Updates your Elgg version.

Elgg 1.12.16 is perfectly fine. It's still the supported LTS version. While the latest Elgg 2.3 version surely has advantages compared to Elgg 1.12 the image upload should work fine also on Elgg 1.12.

Image upload with Elgg's Files plugin or Tidypics or what?

Image upload might fail (beside uploading profile images) because image resizing might fail. Image resizing for larger image files requires a lot of memory. If you have set memory_limit in Elgg's .htaccess file too small it might be the cause of the failed image uploads.

Or you might need to increase post_max_size in .htacces for Elgg to be able to handle the image files (uploaded original file + resized image files).

You could test with an image file that works as profile image. If you can upload it also with the Files plugin (or Tidypics etc.) the problem is likely caused by the limits set in .htaccess and you would need to increase these limits. If the small image also fails when uploaded not as profile image you might have some buggy 3rd party plugin installed that breaks the image upload.

Post in Professional Services group with some more details: who are you and what are trying to do?