Can't upload image to theme

I'm customizing the theme at
http://localhost:55679/wp-admin/themes.php?page=custom-homepage.php&saved=true
WPMU-Nelo Homepage Settings

Under
Blog Top Header Image Settings - 300 x 100
i choose a JPG file from the local file system which is exactly 300x100
I press Upload
I always get an error
"OnlyJPG PNG GIF images accepted for upload"