This is the error I am having for the exact same reason. I am using a .hosts file to point my laptop at the development site as there is a production site with the same name.
I can see references to TimThumb in a few places, but not where to temporarily change it to my current IP. Could you point me in the correct direction?
I would like to say that I love the templates. I has saved me a ton of work and time. I’ve only needed to make a few minor adjustments to the css to make everything else work in my homebrew WP template. Money well spent.