There have been numerous reports here about Image Upload issues, both with the flash uploader and with the browser uploader. Apparently the system is unable to create either medium or thumbnail images.
When I upload images in 2.7 rc2 with browser uploader, I get a 500 server error, while the flash uploader gives an http error. This happens in Chrome, FFox2/3, IE.
This was working for me in 2.6.5 - so obviously something has changed that affects a fair subset of users.
It has been suggested that this is not a wordpress issue, that it is a server issue. However we can't modify our servers if we don't know what to change.
Please, let us know what to do!