Is it me or is this the new joomla release? It worked fine in 3.2 as far as I remember. I tried png as well and gif. Different filenames.
For the unbelieving people, Legal extensions is: bmp,csv,doc,gif,ico,jpg,jpeg,odg,odp,ods,odt,pdf,png,ppt,swf,txt,xcf,xls,BMP,CSV,DOC,GIF,ICO,JPG,JPEG,ODG,ODP,ODS,ODT,PDF,PNG,PPT,SWF,TXT,XCF,XLS for me
I tried uploading an image named java.jpg like your screenshot and it didn't work, then I tried php.jpg and didn't work as well. The same images with different filenames were uploaded fine, so I suppose it's the filename (java, php) and not the filetype (jpg) causing the error.