Excerpts Not Working When 'Read More' Option is Used

This is an odd problem that has just started showing up at my site as far as I can tell.

Here is my issue:

• I have my seven most recent posts shown without excerpts.
• Occasionally those run long enough that I break up a post by inserting "Read more" in the post.
• Posts beyond the seven most recent ones are expected to show excerpts only.
• The issue is that posts with the "read more" tag are not being excerpted like they should. I'm getting all of the post shown up to the point of the "Read more" tag. It's as if the expectation that an excerpt should be showed is ignored if there is a "Read more" tag - except it *is* showing a thumbnail. The thumbnail is not so helpful since it's duplicating the image before the "read more" tag.

I haven't seen this before. The only change I can recall making in recent weeks is that I upgraded Atahualpa to 3.5.3 and Wordpress to 3.0.3.

Thoughts? Suggestions?