I just upgraded to the latest but not greatest wordpress 2.5- and now lost image upload functionality. Changing permissions of folders nor tweaking htaccess doesn’t mitigate the problem. I searched the web. Woah. Turns out virtually everyone else suffers the same image upload problem with Wordpress 2.5. Im disappointed that the eager beavers at WP rushed out a buggy program.

There appears to be a minor workaround that restores functionality for some webmasters though:

First, tweak htaccess and add these lines

<IfModule mod_security.c>
SecFilterEngine Off
SecFilterScanPOST Off
</IfModule>

Then chmod settings for uploads folder set at: 777

In your admin goto: Settings => Miscellaneous.

set ‘Store uploads in this folder’ to: wp-content/uploads (do not put a ‘/’ after uploads)

This worked for some people- but so far, not for me. Good luck!