So I guess the media settings in wordpress 2.7 still don’t work quite right. When you click the press it link and insert an image it should resize it for you using php, then use the medium formatted image in the img src tag instead of linking to the full image. This helps save bandwidth and helps the server load.

So I noticed it was working on my wordpress.com blag. And after a little detective work I noticed that the only reason was because of some CSS in the style sheet.

p img {
max-width:100%;
padding:0;
}

So if the problem I described bugs you also you can use the css above to fix it. It is not the ideal solution, but until the media settings are working right it will at least make things easier.