The White Screen of Death has been a problem since 2.5 and it still persists in 2.7. It even exists on WordPress.com
When trying to insert an image the uploaded correctly the insert page goes to a blank white screen and fails to insert.
The Stupid Workaround
Right now the only way to get an image into a post is to do it via HTML. It uploads just fine so you must copy the image URL and then insert it via <img src="UrlHere">.
Links to the Hundreds of Users who are Having the White Screen of Death