I tried jh2nd suggestion to save the image using a different file extension (I used image preview to resave the file as a jpeg) and it solved the problem for me. This is strange as the file was already a jpeg, but it worked!

Here is a link to the file that could not upload with the "server rejected error" : https://docs.google.com/leaf?id=0BxdQOoYV9eHUZjYzYjU4YjEtMmRiOS00NTA0LTkzYTEtZDExYjI3NzZjNTEw&hl=en&authkey=CJnV8ZUI

Hope that helps with the debugging Brian.