I just tested my installation and the upload works. It is slightly different.
SME 8 Beta 6 -> Drupal 7 in the primary ibay ->Gallery 3 in the default site folder as:
/home/e-smith/files/ibays/Primary/html/sites/default/gallery3
url
http://www._mysite_.com/sites/default/gallery3/index.php/Permissions on the var folder are 755.
Before I upgraded to Drupal 7 from 6, I had gallery 2 in
/home/e-smith/files/ibays/Primary/html/sites/default/gallery2
This was available either as
http://www._mysite_.com/sites/default/gallery2/main.php/or through the Drupal integration module described in the Contribs
Upgrading to Drupal 7 from 6 broke the gallery 2 access (all) but not the Gallery 3 direct access.
One thing I noticed in my notes on the gallery 6 install is this reference which was necessary for me to upload .jpgs-
Since gallery 3 is in the same ibay, it is also affected:
Configure PHP Basedir Restriction per ibay: db accounts setprop IBAYNAME PHPBaseDir DIR1:DIR2:DIRn
signal-event ibay-modify IBAYNAME
Example
db accounts setprop Primary PHPBaseDir /home/e-smith/files/ibays/Primary:/tmp
signal-event ibay-modify Primary
Pasted from <http://wiki.contribs.org/Useful_Commands>