XF 1.2 Error uploading images

I have my image upload attachment settings set to take a 3.9 meg file. When I try to upload a standard pic taken by an iPhone which is about 2.3 megs I get the error.... "The uploaded file is too large for the server to process."

My max pic size is 800x800 but I was assuming that was the size that the image was shrunk down to during the upload process.

What am I doing wrong here?