This is right in our image-inc.php file on the handle upload function
Content visible to verified customers only.
My suggestions would be to double check your image processor settings, recheck the data and uploads directories to ensure they are 777 at every level. Try uploading a smaller file also.
Here is a thread that explains how to tag yourself as a verified customer http://www.photopost.com/forum/before-you-buy/announcements.html