I've looked for the answer on the Wordpress forums. I'm wondering about one reply someone gave:
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Check that you have rights to write to the uploads folder... It is the account that the web server is running under that does the writing, so just giving your account or owner permissions to write may not be enough (depending on how your server is set up)...
Try giving everyone write permissions to start with and go from there...
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Would that have anything to do with it? The error I get is that WP is "unable to create directory wp-content/uploads. Is its parent directory writable by the server?"

Permissions for wp-content folder are 755. I'm using FF 1.5 and XP.

TIA,
Bob

Hi Bob,
chmod wp-content and uploads to 777. You might also want to check this image upload hack. It's a re-write of the /wp-admin/inline-uploading.php file.

I'm having the same problem. Changing the folder to 777 works, but seem like a poor solution in security terms, especially in light of this thread, which has a lot of mentions of wordpress and 777 directories.

This article explains why chmod 777 is not a security risk

Thanks for the replies. I chmodded the folder to 777 and was able to successfully upload the picture. Or at least, I didn't get any error messages.

But the picture still doesn't show up!

Help!

I guess that depends what you consider a security risk. If you mean can someone external to the server write to the file then no, but anyone on the same server can write/delete/modify said file. As a result if "John Doe User" three doors down on the server runs a script or some such that gets exploited and has their account broken into, then any directories or files on the same server that are chmod'd 777 are vulnerable. Even if no files are modified or deleted, the directory becomes a potential repository for further "malware".

One example ... http://forums.asmallorange.com/index.php?showtopic=5815