I'm clicking the icon in the menu for adding images (screenshot attached).
I've tried it on a few different Windows / Internet Explorer setups as follows all with the same problem:
ie8 on windows 7 (64 bit) - in both vanilla and compatibility mode (Orange ISP)
ie8 on windows XP Home Edition SP2 - in both vanilla and compatibility mode (BT ISP)
ie7 on windows Vista Ultimate 32bit SP2 (BT ISP)
also (though I think this may be unrelated)
ie6 on windows XP Professional SP3 (which didn't get to the error messages as it hung the browser when I clicked on the browse button to browse my hd for images)
Hope this helps. Going to try installing on a different server altogether to see what happens.