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:
It's looking like there might be a general issue with image creation on the Sandbox, yes. I'll post more when I hear back as to what might be going on.
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.