This is resolved by creating a temporary folder, setting the permissions on that folder, and updating your php.ini to reflect what temporary folder you’ve created.
This worked for me running XAMPP locally on my Mac.
There are some step by step notes here:
http://www.dwightjack.com/diary/2009/01/04/fixing-missing-a-temporary-folder-error-on-wordpress-27-uploader/
Best of luck.
