UpdatePanels work fine with almost all controls, one control that it does 'break' however is FileUpload. If you try and upload a file it will seem to work - but if you check FileUpload.HasFile it will always return false. Rubbish if you've got an UpdatePanel in your MasterPage! However there is a solution, in fact it's not the UpdatePanel that breaks it, but the asynchronous PostBack instead. So a neat trick is to register the button you're using to cause the upload to use a normal PostBack. This can be done as follows:

this.ScriptManager.RegisterPostBackControl(btnUpload);

Then when the user clicks the upload button they'll get a normal PostBack (and therefore an uploaded file), while all the other controls on the page will continue to operate asynchronously - no need to re-jig the whole layout of the site.