Clear your Temporary Internet Files, then try again. To do so to IE/Internet Options/Delete Files. Also in Settings change the amount to 40 MB. This will help in preventing the index files from becoming overloaded.

If that doesn't help check your settings here: Go to Start/Run/Regedit and navigate to this key:

HKEY_CLASSES_ROOT\.jpg.   For Content Type, it should read image/jpeg.
HKEY_CLASSES_ROOT\.jpeg  For content Type, it should read: image/jpeg.
HKEY_CLASSES_ROOT\.gif     For Content Type is should read image/gif.

NOTE: If you are using AOL: This behavior may occur when AOL's graphic compression option is turned on. When this option is on, the images are saved as the .art file type.

Connect to the Internet through AOL, and then visit the following AOL Web site: www.aol.com. Click My AOL. On the Settings menu, click Preferences. In the Preferences dialog box, click Internet Options (WWW). In the Internet Options dialog box, click to clear the Always Compress Graphics dialog box. Click to select the Never Compress Graphics dialog box. Click Apply, and then click OK.

Internet Explorer Does Not Save Graphics Files in the Proper Format
http://support.microsoft.com/default.aspx?scid=kb;EN-US;q260650

You May Be Unable to Save .jpg Files with Microsoft Paint After You Install Office 2000 SR1 or SP2 http://support.microsoft.com/?kbid=193354