I don't know how you had solved this problem, but I also had it.
After looking at the server log files, and reading some stuff over at the wordpress forums I realised it was a mod_security problem.
If you're having this problem on your UH server, the solution is to add this to your .htaccess in the root of your wordpress installation directory:
Code:
<IfModule mod_security.c>
SetEnvIfNoCase Content-Type \
"^multipart/form-data;" "MODSEC_NOPOSTBUFFERING=Do not buffer file uploads"
</IfModule>
<IfModule mod_gzip.c>
mod_gzip_on No
</IfModule>
Solved the problem for me
reference -
WordPress › Support » 2.5 image upload