Perhaps I don't know enough about how this works, but couldn't you use this to inject runnable javascript in to a page? If this is possible it's pretty scary as it would allow you to upload a hidden payload in to an otherwise innocent looking image.
I think a similar exploit was used recently with .svg images - they can contain javascript (being XML) which will be executed by the browser. Not sure about the details however.
However, the JavaScript shouldn't execute if the image is embedded via <img>.