Hmm.. Same issue here. I wonder what hosting provider does Monkfish uses?
I’m having the exact same issue and my host is BLUEHOST. I checked and GD is enabled, also try with png in addition jpg just in case.
Host recommended me to increase memory via php.ini and that didn’t work either. I’m personally not a fan of BLUEHOST (that’s my secondary host) but they are nos suggesting me to upgrade PHP version from 5.2 to 5.3 but I’m aware of few WP issues dealing with latest php so I rather stay in 5.2, so… just open to recommendations here as part of troubleshooting. 
issues with 5.3? That’s not something I have heard. We are using 5.3.13 here which is what I also use on my development sites… haven’t encountered any issues that I am aware of.
Anyway – the problem. Have you done the Firebug test to check for any reported errors?
yes, wp works fine with 5.3.x… majority of wp sites on 5.2 still pretty high but 5.3 climbing dailly… 5.2 is security fixes only so not really supported…
Hey,
It wasn’t a problem with my host. I am on an unmanaged VPS system, so I had to request that the software I needed be installed.
GD wasn’t, so that was where the problem arose.
I just needed some detective help to figure it out.
But my server is running php 5.3.13 and everything is now running fine.
LOL!