I found the solution here…. http://mygraphicfriend.wordpress.com/2009/04/15/unable-to-upload-files-larger-than-2mb-to-media-library-in-self-hosted-wordpress-blog/

I’m with HeartInternet and all you need to do, is create a php.ini file with the following…

post_max_size = 12M
upload_max_filesize = 12M