Just to update,
Cleared my cache, Replaced the insert new product page with a clean copy, deleted image files from server and info from db.
Now I can't get it not to work. I used your image Michael, and a load of others. I am curious as to why it failed the first time - up until the point I removed the images/thumbs validation code, and as to why all is working well - now that things are back to how they were.
Michael, just so I know if our situations are similar, - are your files also actually being uploaded to your images/uploads folder?