Remove PIL from your app modules folder and just add it to your python 
installation by simply installing it.

I would also recommend going with pillow instead of regular PIL as they 
fixed quite a lot of very old bugs.

You can get a windows pillow version here:
http://www.lfd.uci.edu/~gohlke/pythonlibs/#pillow

Afterwards, restart web2py and you should be good to go.

-- 
Resources:
- http://web2py.com
- http://web2py.com/book (Documentation)
- http://github.com/web2py/web2py (Source code)
- https://code.google.com/p/web2py/issues/list (Report Issues)
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