Image has failed to upload due to an error.

Try changing the permissions of the /wp-content/uploads/ directory to 777.

I tried changing, doesn’t work either.

In that case, try changing the permissions on the /wp-content/uploads/2010/ directory to 777.

I changed the settings using a FTP client, is that causing it not to work?

No, that shouldn’t be a problem. We might as well go all out with this. Set the following directories to 777:

/wp-content/
/wp-content/uploads/
/wp-content/uploads/2010/

If that doesn’t work, create a /10/ directory in the /2010/ directory like this:

/wp-content/uploads/2010/10/

and set that to 777 too.

I have set everything to 777 and it still doesn’t work. I have to set the file permission of the folders right?

Unable to create directory /wp-content/uploads/2010/. Is its parent directory writable by the server?

or do you think I should roll back to older versions of wordpress?

I think you should contact your hosting provider. The directories now have world-writeable permissions, which means that everything should be able to write to them, even WordPress, but something might be happening at the server-level to prevent this.

It happens right after I upgraded to 3.0.1, is this one of the problem?

I don’t think so. There’s a couple million people out there using WP 3.0.1, so if this was a problem with 3.0.1, it certainly would be significantly more widespread.

So there is nothing else I can try and do?

You could try downloading WordPress again and delete then replace your copies of everything except the wp-config.php file and the /wp-content/ directory with fresh copies from the download, but I doubt that’s the problem.

If I reinstall wordpress again, will it mess up my current settings?

No, your settings and content are safe in the database.

Thank you for your help and patience, I will try it out and let you know.