I'm having the same problem. I had previously moved wp out of a wp directory to the root level. After hours and hours I discovered a hack to fix my problem - set my miscellaneous (settings) path back to the wp/wp-content/uploads and magically, I was able to upload! Not ideal, but I was tearing my hair out !
I am not even up to trying to insert an image now !
"Error saving media attachment" when using browser mode
"Is its parent directory writable by the server? " when using flash mode
theme: lifestyle 4.0 (current)
permissions on wp-content: rwxrwxr-x
permissions on uploads: rwxrwxr-x
uploads directory owner: same as my account name
upload path set to: wp-content/uploads
reinstalling all wordpress 2.8.4 files
making new upload2 directory and setting the path to wp-content/upload2
Turning all plugins off at the same as switching to default theme
deleted cache files from wp-content directory, emptied brower caches (2 different browsers)
putting the following code in .htaccess - what happens the error message changes to: Is its parent directory writable by the server? Answer - yes, wp-content is. Should public-html be ? (I don't think so !)
site was originally in wp directory, I moved it root level, and upgraded to 2.8.4.
Someone had to go into the database to fix the paths for the images, but after they did that the images showed properly and were not called from the wp directory.
At some point the thumbnail images in the library stopped showing. I think it was after I edited a post where I added a youtube video, but did not add any pictures (because the library hasn't been accepting files!).
So I renabled my old wp directory, so that the thumbnails show in the library (from the wp directory).