Graham v. Dorling Kindersley Limited (decided May 9, 2006, U.S. Court of Appeals Second Circuit), the ruling is worth reading in its entirety: http://www.lessig.org/blog/archives/05-2514-cv_opn.pdf
It is a very interesting case and I find it very encouraging. The most relevant aspects in respects to Wikipedia seem to me (non-lawyer that I am) to be:
1. That moving a work into a very different context seems to be considered transformative (i.e. from "expressive use of images on concert posters" into a "biographical work"). Does moving an image into an "encyclopedic work" make it "transformatively different"? Under the court's argumentation here, almost certainly (accompanying the images with textual material and creating something substantially different as a whole than the original).
2. The Court takes the Kelly v. Arriba Soft Corp. and uses it to say that reduced size reproductions of posters (or photos, presumably) counts as using "less" of a work. That's a great thing to have ruled somewhere, because otherwise the Kelly v. Arriba Soft left open a lot of questions in that respect (i.e. since it was only for a search engine and only dealt with very small thumbnails). The court's ruling basically justifies our current policy in regards to size, that it should be the smallest size possible in order to permit the transformative purpose (in our case, to illustrate the article appropriately).
Pending discussion, this would seem to me to point towards two directions in policy: make more firm the "reduced size" requirement, and liberalizing some aspects on how images are used in articles (I would still rule against galleries and using them in lists for the most part, but their use in relevant articles accompanying relevant text would seem pretty assured to be transformative). Of course this is not the end of the show (one court ruling does not determine everything, but it does point to some relevant guidelines), but it does give more confidence in certain assertions in respect to policy.
Other intepretations, thoughts, etc. on how/whether to use this to guide any of our policies would be greatly appreciated.
FF