Today I have successfully upgraded my live site to Joomla 3 as well, and the gallery upload is working fine there too. We'll never know for sure what it was, perhaps an old extension that wasn't compatible with J3 and is no longer on there, and therefore also no longer causing the issue, or who knows what it might have been... What matters is that it's solved!
Thanks for the update on the new CB Gallery functionality with CB Activity, I have in the meantime updated everything to the latest build and it looks neat, thanks!
