@vickie, I'm not sure if I've got *exactly* the same problem as you. But I have been unable to resize photos in posts--using either the editor or the resize options (which map to Settings > Media). Instead, all images appear full size because they are assigned the class size-full and that class cannot (easily) be overridden.
I've been working this for hours to no avail--but then I found this article. Note the reference to "GD library" in the Crunching paragraph. Turns out I was one of the people without this installed on my server, so the WordPress feature that "crunches" images down to the sizes established in Settings > Media weren't relevant. With this installed, everything works fine.
@esmi, there are many reasons *not* to resize images prior to uploading (e.g., to insert smaller images that can be viewed full size on click; to make it easier to insert a large number of images, which is what I'm doing right now as I convert an old blogspot blog to WordPress). And I'm guessing that why the "crunching" feature exists in the first place.