Image Module Throwing Bogus "Access Denied" Message For Private File Requests

I have a problem with the image module not serving private files. Frankly, I can't find the root cause and the problem may well lay outside the module. So, I am hoping someone might advise me how to pinpoint the cause of this issue.

Details as follows.

Drupal Core Version: 7.12
Image module version = 7.7 (2011-07-28)

Here is a typical image request:
http://example.com/system/files/styles/thumbnail/private/image.png

The problem becomes noticeable within this function located within image.module.

function image_file_download($uri) {
  $path = file_uri_target($uri);

  // Private file access for image style derivatives.
  if (strpos($path, 'styles/') === 0) {
  ...
}

The problem is the URI passed to the function looks like this:
private://image.png

Because 'styles' doesn't exist in the path, the if statement doesn't get executed the function doesn't return any values and ultimately, Drupal responds with "access denied" which is a bit misleading as:
-The image in question *does* exist in the root of the private directory
-The file system does give Apache access to the file
-The user in my tests is administrator (uid=1) who does have access to the image.

As a *temporary* measure, I got images to display by replacing this line:
if (in_array(-1, $headers) || empty($headers)) {

with this:
if (in_array(-1, $headers)) {

In an attempt to reproduce the problem, I copied all my installing modules to a fresh instance of Drupal. However, the problem doesn't occur there. It's nothing to do with the theme either.

Being a Java programmer, I attempted getting a stack trace. But, that didn't help me. Although, I did wonder what an image request has to do with menu.inc.

0 (Array, 4 elements)
- file (String, 92 characters ) C:\Program Files\Apache Software Foundation\Apache2.2\htdocs\bbps\modules\image\image.module
- line (Integer) 796
- function (String, 20 characters ) drupal_access_denied | (Callback) drupal_access_denied();
- args (Array, 0 elements)
1 (Array, 2 elements)
- function (String, 19 characters ) image_style_deliver | (Callback) image_style_deliver();
- args (Array, 3 elements)
- - 0 (Array, 5 elements)
- - 1 (String, 7 characters ) private
- - 2 (String, 9 characters ) video.png
2 (Array, 4 elements)
- file (String, 83 characters ) C:\Program Files\Apache Software Foundation\Apache2.2\htdocs\bbps\includes\menu.inc
- line (Integer) 517
- function (String, 20 characters ) call_user_func_array | (Callback) call_user_func_array();
- args (Array, 2 elements)
3 (Array, 4 elements)
- file (String, 75 characters ) C:\Program Files\Apache Software Foundation\Apache2.2\htdocs\bbps\index.php
- line (Integer) 21
- function (String, 27 characters ) menu_execute_active_handler | (Callback) menu_execute_active_handler();
- args (Array, 0 elements)

If you managed to get this far, thank's for reading :-)