I'm probably beating a dead horse at this point, but I agree, the photo option needs to be revamped to allow larger high-resolution photos. The only way that I found to post a decent photo on our LUWS is to set my digital camera to the lowest resolution setting, take the picture of the person from a distance of about 15 feet, upload it to my computer, and then crop the living daylights out of it. The result is a tightly cropped VGA-quality photo of only the person's face. The resulting image is so tightly cropped, in fact, that if the member had a goatee, you wouldn't know it because you wouldn't be able to see it!
I think the only logical solution to this problem is increasing the parameters of an acceptable photo. While there are applications available that magnify pictures, like someone in this thread before me mentioned, they don't increase the resolution. The bigger concern, however, with third-party applications is how many non-tech savvy members would actually use such an application? Based on my personal experience with our stake members' use and knowledge of computer tech, I would say not many.