OK, I dug into your actual PDF file and your image scaling is not correct.
Your image is scaled to 1250x1024 and the JPEG for page 2 is 264156 bytes long.
The PDF library is rendering the media box to 14.2" by 17.4" to hold the large image and the iLiad is thus scaling it to make it fit on the screen. You'd do much better to scale the image to a maximum height of 935 using Java's 2D as it has a much better scaling algorithm than the iLiad has at present.
I would also suggest having Java reduce the gray color space to match the iLiad's as well since again Java's 2D package has a better method available.
The iLiad grey values are: 0xf0, 0xe0, 0xd0, 0xc0, 0xb0, 0xa0, 0x90, 0x80, 0x70, 0x60, 0x50, 0x40, 0x30, 0x20, 0x10, 0x00. Future versions of the iLiad (or current users of my enhanced ipdf) treat 0xff the same as 0xf0.
I recommend a media box of 425 by 351.
Based on the large size of the DCTStream I suspect you didn't actually convert the image to a gray scale bitmap in Java 2D, just reduced the colors to gray and left it in a RGB Bitmap. If you convert the image to a gray scale bitmap and feed it to the JPEG encoder you will produce a grey scale JPEG which is considerably smaller than a RGB JPEG as it doesn't need to compress the color space, just crunch down the luminous data.
This will not only reduce the size of the resulting PDF document but in a soon-to-be-released version of Poppler it will result in a considerable savings in decoding time on the iLiad as well.
I personally recommend using
http://www.pdfbox.org and I've posted various tools w/Java source here (despite libelous statements about my source code sharing habits made by another member here) that use that library so you can find examples of using it to create iLiad friendly PDF's.