I'd heard it's not possible and read just yesterday that with Microsoft's Atlas/ Ajax Beta it's NOT possible, due to how the XMLHttpRequest object handles connections.
However, you can use iframes to make ajax-like file upload system, and make it work with ajax extensions. Here are my blog posts which also includes downloadable source code:
You can easily add javascripts to show and hide your animated image, when button is clicked and after process is complete (in RegisterStartupScript method)
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