Hi,
If anyone else is having similar problems to Mazy, I think we have found the cause.
The gallery will only try to resize images that are too large in height and width - not file size. So it is possible to resize an image yourself to 640 pixels wide or less, but still exceed the maximum file size of 146.48kb. In this case you will get the error message above.
With most photos resizing before uploading will also reduce the file size enough, but obviously not always as in Mazy's example.
Photos above 640 pixels wide will still be resized automatically as before, but the best image quality will come from resizing AND compressing photos yourself.
Cheers, MD.