image module fails on dual site configuration

The image module is failing on a vanilla 4.6.2 install under a dual site configuration. Here is the scenario.

1. clean install of 4.6.2 on a Linux box

2. install of latest 4.6 image and folksonomy modules.

3. image upload tested and working fine.

4. created new directoy under /sites called "site1.mydomain.com"

5. copied settings.php from /default directory to new directory created above.

6. modified settings.php for new $base_url ($base_url = "http://site1.mydomain.com")

7. tested drupal instance using site1.mydomain.com url (works fine)

8. tested image upload and recieved the following error "File copy failed: source file does not exist."

9. log shows "Invalid argument supplied for foreach() in /home/myusername/public_html/mysiteroot/modules/image/image.module on line 315."