To everyone:
Please try using browser uploader instead of Flash uploader to see if it works, in case you haven't tried.
And try restarting the browser in a "safe mode" to make sure your customization (extensions, add-ons, settings) are not causing this.
This could be caused by your firewall settings or antivirus software. If you have any other location or machine you can test this with, you may be able to narrow down the source of this issue.
Please post full text of the error message if you're seeing any.
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@roxycarolla
Your blog is not on WordPress.com, and we are unable to provide support here. Please visit: http://wordpress.org/support/
(Also to everyone: Please make sure you're seeing [YOURBLOG].wordpress.com/wp-admin/ URL. Otherwise, the above suggestion applies to your case as well)
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@shananigansofcaelestrasz
I was able to upload an image using the URL you provided in the beginning of the post (feel free to delete it after checking).
What happens if you download previously uploaded image and try to re-upload it? Will it still give you the same error?
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@assetalmanac
Maybe you have done this and just not stated so, but could you try using another browser or computer to test if the problem is specific to Internet Explorer (which you said you are using).
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@djeddieo
Do you have any custom extensions/add-ons installed on your IE7/Firefox/Chrome?