RAC

Here is another thing to try. My ISP (A2 Hosting) had trouble the past two days that affected image uploading. This is their advice as posted today:

Symptom:
In WordPress Admin -> Add Post, you insert an image, but the uploaded image appears as a broken link in the body of your post.

Fix:
-In cPanel’s File Manager go to the document root directory for the domain in question. For primary domain this is public_html
-Set wp-content/uploads/ and all its subdirectories to 755 permissions. You can do this by highlighting the directory, then right-click on the highlighting and choose Change Permissions.
-Set images within these directories to 644 permissions. This will likely only need to be done within: wp-content/uploads/2011/02

Then test making a post with an image again.

I will be trying this later tonight.

I am having a problem uploading images too with 3.05.

Here is a workaround to try.

After importing the image I get a little blue box with a question mark in it.
I click the edit button under the little blue box and the image appears. I rotate the image and then return it upright. I now can save the image and post it as usual.