I am currently experiencing this very same issue. I did the staggered upgrades via the patch releases: 7.0.3->7.04->7.0.5->7.0.6.
Once I ugraded to 7.0.6, It locked everyone including Admin accounts out. The password reset forms didn't work either due to not actually sending out the e-mails, or they would send a temp password that didn't work. I tried all the tricks in the forum for resetting the passwords on the database side and that didn't work either.
I finally gave up and started over from scratch with a freshly downloaded 7.0.6 zip file and created a new database for the install. The install was a success and I can now log in with my Admin account but when new users sign up, they are immediately locked out of the site. This occurs with a regular account creation and with the Live Join module I use for my site.
Very frustrating as this is a critical time for my company's site. We're an up and coming Independent Artist Radio Station and we need our Indie Artist Community to be in solid working order. Any ideas or help on this would be greatly appreciated.