Hi dpingram,
I will try to help. First, did you use the right option? You need to use Option 1 if you have the image loaded onto a photo storing site such as photo bucket. In that case, you need to copy and paste the address from your browser.
You need to use Option 2 if the image is on your computer. In that case you need to navigate to the file name and upload it.
Even though you cannot upload an image into a post from your computer, I THINK you can upload an image from your computer to use as your profile picture. In fact, I THINK I did this (although I wouldn't swear to it).
I THINK I also got the same error message, but the photo uploaded nonetheless.
Does this help? If not, you are welcome to send me a PM with a phone number where I can call you tomorrow and I will try to walk you through it.
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