The newly released WordPress 2.5 has media uploading issues. The suggested solution is to add a few lines of code in the .htaccess file.
One more important thing especially for Linux users is to upgrade to the latest version of Flash which is available for download from Adobe. The latest version I installed on Ubuntu was 9.0 r124.
This can be checked out by opening a new tab in Firefox and typing about:plugins. Check under Shockwave Flash and the version number should be there.
This is not only applicable for custom WP installation but also for blogs hosted at wordpress.com.
BTW, the lines of code that should go into the .htaccess files are this.
<IfModule mod_security.c> <Files async-upload.php> SecFilterEngine Off SecFilterScanPOST Off </Files> </IfModule>
If you do not have a .htaccess file, create one and place it at the root of your website. If you already have one, add this code at the end of the file.