Having problem with hosting and need recommendation

I am really having a problem getting my site going with my current hosting. It is a BuddyPress Multisite. I have my main site on blogsmu theme. I want people to be able to join my community and create a blog. I want there to be two levels of blogs - free and pro. The free blogs will be limited so the user can only create around six pages with my advertising on them. The paid blogs will have no advertising and the members can create one blog with pages and posts. I will not have BBpress or any other forum.

I currently have this on TMDhosting VPS with one node for which I am paying almost $30.00 a month. I have my main site set up and have created seven test member sites. My largest test site is six WP pages and has a page with one gallery with 4 images in it.

Here is my problem:
The galleries on the test sites display broken images. I asked TMDhosting why this was happening and they told me that I do not have a large enough package for my site. They said I need their VPS package with five nodes that costs $55.00 a month for my site, in its current state, to function. They said the WP gallery is using too much memory.

I told them in the future I hoped to have a least 1000 member blogs and this was their reply - "If you will need a package which will support 1000 blogs we may only offer a dedicated server for that, and this should be our highest dedicated server plan. Depending on the blogs access rate and database size even the highest dedicated servers package may be overloaded. However there is no way to predict that before it is set and the blogs installed on it."

TMDhosting is saying that their highest dedicated server at $318 a month will not support what I want to do. I know there are people here who are hosting sites with a lot more than 1000 members, so how are they doing it and how much is it costing them?

Can someone please tell me exactly what kind of hosting I should be getting?