THUMBNAIL and resizing issues

I have a wordpress install (2.6.2) and when I upload images to add to a post rather than resizing the images for medium and thumbnail the Wp install just places the images and adjust the size with the html/ css code. For example I have another blog (2.6.1) that if I upload and image “myphoto.jpg” on upload automatically the image is resized to my thumbnail and medium size. The thumbnail name is “myphoto-65×65.jpg”.

Is this something that was changed in 2.6.2 or is there a problem with my install or resizing script. I desperately need help. If anyone know how to fix this I please help!