Good news -- I'm getting the SAME ERROR when I try to upload a large pic (in excess of 600K). In fact, I'm getting the same error when I try to upload a large pic to the gallery as well.
I've just called our datacenter, they're looking into this right now. Sounds like it could be a sitewide upload limit that came into place after our server move.
Thanks again for the extra-detailed error info. It makes troubleshooting so much easier.