When trying to upload an image for the product the section with the image name gets a red border and an error message appears.
When trying to upload something for the downloadable products...well..
same s**t different a**h**e (pardon my French).
Here is what I did to fix it:
The problem seems to be caused by the prototype v1.7.
It works great with prototype 1.6
Get the 1.6 version from here http://prototypejs.org/assets/2009/8/31/prototype.js
Create this file: js/prototype/prototype1.6.js and put the contents from the link above in it.
Now edit app/design/adminhtml/default/default/layout/main.xml and add this line
<action method="addJs"><script>prototype/prototype1.6.js</script></action>right below
I don’t think it’s a problem if you edit this core file. I can assume that the guys at Magento will fix the issue with the uploader untill the next version (at least I hope it’s the same issue as reported here: http://www.magentocommerce.com/bug-tracking/issue?issue=12265 - and they claim it’s fixed)
I hope this helps someone