I worked with this as well and supporting IE7 can be very tricky. While it works really well for successful file uploads, if you're anticipating to return any type of error response (ex: 400, "invalid file type") then you'll need to add some workarounds to your server code and the iframe-transport file that comes with this. Primarily you'll need the following two adjustments:

* Your response must be at least 512 characters (we added white space padding to our JSON response). This is because IE overrides any 400-500 response with its friendly error messages unless you provide at least 512 characters of data. If you don't do this you'll get a cross site scripting error (because you'd be trying to read in the friendly error page, which is not on your domain)

* You'll need to add the response code in your response text because there's no way (please correct me if I'm wrong) to read the http status of a loaded page's headers in an iframe. You'll then need to modify the iframe-transport to read in the status code from your response text and make the appropriate ajax calls in jQuery.

This is obviously quite a bit hacky (and took me forever to figure out). Let me know if anyone else has any insight into this. I'll probably write this up in more detail in a blog post to come.