A Google Groups thread has confirmed reports that the Google AdWords API image creation feature does not work properly in the sandbox environment.

When programmers try to enable the image ad feature in test mode (sandbox), they get an exception response from Google that the image could not be recognized.

AdWords API representative, Jeff Posnick, confirmed the bug in the Sandbox, saying:

When this will be fixes is currently unknown. I am sure it is not a huge priority, being that this is two areas which are not critical. (1) Image ads are not incredibly popular in Google AdWords and (2) The text environment (Sandbox) is not a critical area of concern for Google.

Forum discussion at Google Groups.