There are a couple possible reasons for this. First, check to see if you can add an image through WordPress’s normal posting mechanism. If not, then check the following:
- Your server does not have the php-gd library installed. Ask your hosting provider about this.
- Your wp-content/uploads directory is not writable by the webserver. Make sure that it is.
- “Use custom image field for images” setting is set to “Yes,” change it to “No.”