After testing all the work arounds and fixes, including fixing the .htaccess, I finally got around the image upload problem. Here’s what I did:
– Installed the no flash uploader
– Made sure that my images were smaller than 400kb
Unless I made the images as small as 400kb, WP wouldn’t create thumbnails etc. Sad that it isn’t possible to work with fuller size images, but unfortunately this was the only way I could start blogging again after the upgrade.