I just created a fresh install of Jommla 1.7 on my domain. I made sure all the folder permissions were writable. I installed a template. It said it was installed successfully. I went into my CPanel file manager and discovered that the folder created by the install and all the folders and files within it were unchangeable. I cannot upload a file and place it in any of the folders, neither can I change permissions on any folder or file in the newly installed template. Essentially the template files cannot be changed or added to. I cannot upload a logo for the template or change any parameter...it is essentially useless to me because I cannot modify a single thing in it.
I believe it is an ownership issue. It is only involving the newly installed template. Anything outside that installation can have permissions changed and will accept uploads. I installed the template in the normal fashion using the extension installer in the joomla back end administrator.
This happened to me on another domain. I had my webhost do a chown command on the template folder and I was able to modify it from my CPanel file manager but the back end template editing interface would not work anymore.