Problem with Drupal 7 file permissions I set up a working Drupal 7 installation on somebody else's server and the image generation only worked if all folders leading to the thumbnail folder were given 777 permission.

This must be a an Apache configuration issue - has anybody else come across this?
You need to go to your drupal installation root folder and type the following

chown -R user:www-data .
find . -type d -exec chmod u=rwx,g=rx,o= {} \;
find . -type f -exec chmod u=rw,g=r,o= {} \;


where www-data type the user under which apache/http process runs

Then go at sites/ directory and type the following

find . -type d -name files -exec chmod ug=rwx,o= '{}' \;
find . -name files -type d -exec find '{}' -type f \; | while read FILE; do chmod ug=rw,o= "$FILE"; done
find . -name files -type d -exec find '{}' -type d \; | while read DIR; do chmod ug=rwx,o= "$DIR"; done


See http://drupal.org/node/244924 for more information.