This appears to have been an ongoing problem which has never been resolved, 
see *this 
post<https://groups.google.com/d/msg/google-themes-api/WNeDoC6NFS4/zkYIhCd6QTEJ>
* from 2008 and numerous other discussions since. The submit process seems 
to have no problem in reading your XML file and listing the .jpg files it 
needs to access. But the subsequent process appears to proceed so quickly 
that the server hosting your .jpg's simply can't respond fast enough, 
sometimes even if the files are hosted on Google's own servers.

The only way around this seems to be to make your .jpg files smaller (the 
Developer's Guide suggests <40 kB), host them on a faster server, or just 
keep trying...and trying...and trying...

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