I think for your situation, which requires more than the 'one small file upload' you are right to think about some external solution. I do that on my site, the file upload is on a sidebar section and I refer the customers there. As such, it is not part of the in-line order form, but is, I hope sufficiently referenced in that form. I don't think it is that customers REFUSE to resize their image, I think they just don't know how. I am constantly amazed at the things customers say, like, "how do I order the product" when they are on the ordering page. And how many customers still don't know how to scroll down the page. Which, is simply all challenges for us to overcome if we want their business. BTW, the wyldeart site crashes my Firefox when I try to open it. Have to use Netscape or IE.
Good luck!