Works for me

I use SL Image Upload a lot. I've seen this same issue occur very rarely a few times. Always it goes away shortly. My guess is that during serious grid attacks, hack attacks, or very high concurrency, LL will disable connections to the grid from certain unconfirmed third party clients until they can sort things out.
However, to keep with the topic, I'll post a tutorial for how to optimize images for compression. Feel free to spread this around in any medium; I encourage it (I still need to get some proper tutorials together.)
File size of JPG2000 images is actual image size, per-channel range of channels used, and range of unique color values. JPG2000 lossless has compression, it just is lossless. On the extreme end of uncompressability would be an image of color static with every pixel a unique value and wide variation between adjacent pixels. On the extreme end of compressibility would be a solid black image

Most sculpts spat out from 3D programs and tools have "extra" information not used. The default apple is an example of this:

Here is the same sculpt optimized for compression (extraneous values thrown out):

Bad apple is 7.58 kb via SL Image Upload (SLIU), whereas fixed apple is 5.56 kb. They create the exact same sculpt. The lossless bug hits around 6-7 kb, so fixed_apple is vastly preferable.
Here are the steps to optimize any sculpt in photoshop:
1) Save the image below to your HD and open it and your sculpt in PS. Resize your sculpt using nearest neighbor sampling to 128x128 if needed, then copy it is it is an actual layer and not the background (Delete the background.) Then add the pixel sampling template as a new layer.
http://img378.imageshack.us/img378/8135/sculptsamplingtemplatete2.png
Your setup should look something like this: http://img378.imageshack.us/img378/2456/comptut1jy4.jpg
2) Make the sampling template the active layer, and use the magic want tool with 0 tolerance and antialias unchecked to select the entire black region. Make the sculpt layer the active layer and press delete.
This is what you should get:
http://img146.imageshack.us/img146/4801/comptut2rv4.jpg
3) press control A to select all, then alt drag (copy) the layer to the _right_ twice to fill three columns of pixels. Select again, then alt drag (copy) the layer _up_ twice to fill three rows of pixels.
This should be your result:
http://img396.imageshack.us/img396/9185/comptut3pe1.jpg
4) Select all, then deselect the top row of pixels. Move the selection up one pixel to completely fill the columns. Select all again, then deselect the right column of pixels. Move the selection right one pixel to completely fill the entire image.
Your result should be the above fixed apple

Now, why do you need to do the strange steps to fill the sculpt image? Because the sphere and cylinder sculpt type actually has 32x33 verts, and plane 33x33. The "extra" 33rd rows and columns of verts are smooshed as the final rows/columns of pixels on the top and right of the image. So this method will make sure that you do not waste any vertices.
Now, upload using SLIU. If the file size is more than 6 kb approximately when you upload it, resize the sculpt to 256x256 pixels using nearest neighbor resampling, then upload it. 256x256 images tend to be twice as large in file size as 128x128's, despite having four times the pixels. This is due to retained efficiencies in compression.