I wasn't able to find the exact breakdown of what your version of Photoshop Elements supports, but I would guess the Photoshop Elements 5.0 document here is very similar to Photoshop Elements 7.0 that you have. This document might help as well.
Essentially, the reason that you are probably seeing that error message is because you are trying to open a file that is not a (.jpg, .jpeg, .jpe, .jfif) standard JPEG extension, OR the file is JPEG but it is corrupt.
I would look into how you are creating the photos. Are you using the standard camera application or have you edited the file in some way on the phone. Potentially the software on the phone that is used for editing is saving the file in a format that is not compatible with Elements.
Other workarounds would be to open up the file in another editor such as Irfanview or XnView and make sure they can read it, if so, resave the files(with a new name) and the correct .jpg extension.
The files could also have a colorspace that is undefined or not recognized by Elements. I would look at the EXIF of the file and see if a colorspace is defined and what it is.