Disabling image crunching???

Have you tried improving image quality of resized images via the functions.php file (BACKUP this file before trying):

function ajx_sharpen_resized_files( $resized_file ) {

    $image = wp_load_image( $resized_file );
    if ( !is_resource( $image ) )
        return new WP_Error( 'error_loading_image', $image, $file );

    $size = @getimagesize( $resized_file );
    if ( !$size )
        return new WP_Error('invalid_image', __('Could not read image size'), $file);
    list($orig_w, $orig_h, $orig_type) = $size;

    switch ( $orig_type ) {
        case IMAGETYPE_JPEG:
            $matrix = array(
                array(-1, -1, -1),
                array(-1, 16, -1),
                array(-1, -1, -1),
            );

            $divisor = array_sum(array_map('array_sum', $matrix));
            $offset = 0;
            imageconvolution($image, $matrix, $divisor, $offset);
            imagejpeg($image, $resized_file,apply_filters( 'jpeg_quality', 90, 'edit_image' ));
            break;
        case IMAGETYPE_PNG:
            return $resized_file;
        case IMAGETYPE_GIF:
            return $resized_file;
    }

    return $resized_file;
}   

add_filter('image_make_intermediate_size', 'ajx_sharpen_resized_files',900);

Have you tried increasing PHP memory limit in your server? Check your php.ini file to see what it is set as and try increasing it to 256M or 512M. I’ve had issues before when it was set at 32M by default. Rather than modifying WordPress core files (which will only reappear when you update WP), try tackling this from the other way.

I think it was Phil that first suggested that it could be a memory issue. I just had some hard numbers that I thought might help 🙂