i was having a frustrating time doing this – it kept just hanging with a blank white screen, so I had a look around tinternet. Turns out a lot of people uding WordPress are having trouble with this at the moment, the solution that worked for me was:
1) use firefox not IE (some people say there is a specific issue with IE )
2) only have one tab to the blog pages open at a time
3) ignore the message you get telling you the picture failed an upload test – if you can see the image in the screen, its there.
once I did this i had no further problems