I just went through this. I am at liquid web. Here is their response:
Under the wp-content directory you will need to create the “uploads” folder.
Once that is done it will need to be chmodded to 777 in order for the web
server to write to it. I have done this for the isitjustme.com domain so you
should be able to upload files now.
I am but…
But I am finding the instructions at WordPress terribly lacking!
Now, i can upload the image, but i can’t figure out how to get the uploaded image into the post. It really shouldn’t be so hard! After spending hours on such a simple problem and not finding a solution, I am thinking of switching software and going to movable type, in the hope that the books that have been published will be more useful than I am finding this site’s support to be. By the way, i tried this out on Blogger and the picture function works EXACTLY as you think it should. It took me 2 minutes to get it working. If this is helpful-and you get this going with the info I posted from Liquid Web, and you are able to post pictures, could you share the knowledge of HOW YOU GET THE PICTURE FROM THE UPLOAD BOX INTO THE POST?!?
Thanks,
Karen