I have just updated Photoshop Elements from 12.0 to 12.1 and I am now unable to drag layers from one file and drop them into another. Help!

I was able to do this until I updated. I need help fast as I need this feature to complete daily tasks for my job. I've come to a halt with my work because of this.
I have the two files open as shown below. I'm trying to insert the image in the file on the left to the file on the right but when I drag to drop into the file, it doesn't happen.
The cursor indicates it has picked up the image but it doesn't indicate that it can't be dropped, it just doesn't work. Help!!

Given that you're on XP, we'd better try the following document:
iTunes displays -50 error message when syncing iPod on Windows XP

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