Looks like your editing software made the photo size larger? 

Editing software sometimes changes file extensions after altering the image, make sure it is a .jpg, a well excepted extension.

After reading your original post again I think your dilemma is based on file size, as Seamonster stated. Your upload picture size must be under 150KB in total size. If it is over it will not be accepted. Adjust image size from the menu (not sure of your program so I can't be more specific than that). Usually 800X600 will do the trick. Editing a photo can increase the file size so do what you want to the photo first, then change the size of the image last. And make sure when you save the final copy it is in the .jpg extension.

I use iphoto09.  just double click on the image you want to edit and select edit.  once finished editing just click done and you are good to go.  You can resize as needed after you are done editing.  For resizing I used the link on the homepage picresize.com

Done  

I love iphoto.  which version do you have?