Uploadify is an excellent upload plugin script. One issue that I recently encountered was how to notify uploadify that an error occured with your server side scipt while processing a file. I found that by returning a status code of 405, uploadify will mark the file as errored (highlight in red in the queue).
To accomplish this, you should set the status code to 405 with your response from your server side code. The below example show how to do this in C#, the the same applies for any server side language (php, ruby, etc).
I have placed this in a finally block and check a local variable response and set the status code if the value is not success.
if (response != returnValueSuccess)
context.Response.StatusCode = 405;