If you are, please do these:
(1) Try clearing your browser’s cache:
http://www.google.com/support/accounts/bin/answer.py?hl=en&answer=32050
Note: If you are using an IE9 browser in compatibility mode that makes it render as IE7 and IE7 is not supported. To disable see > http://www.sevenforums.com/tutorials/1196-internet-explorer-compatibility-view-turn-off.html

(2) If you are not running one of the browsers and versions listed at http://browsehappy.com/ please try upgrading to the most recent stable version of your browser.

(3) Try with all browser extensions or add-ons temporarily disabled.

(4) These are the accepted file types:
.jpg/.jpeg
.gif
.png
instructions here > http://en.support.wordpress.com/images/
Here are more details about the options for uploading images:
http://wpbtips.wordpress.com/2009/04/26/images-the-three-link-options/
troubleshooting images here > http://en.support.wordpress.com/images/troubleshooting-images/

If you aren't successful let us know which browser (and version of it) you’re using and post any error reports you get.