check if shell_exec is not blacklisted.

We had the same problem. It turned out that on our webserver the function shell_exec used by phpthumb was blacklisted.
Some providers do this for security reasons.
You can check by opening your phpinfo page from joomla backend.
Search for "shell_exec" on the page.

If you find something like

suhosin.executor.func.blacklist | shell_exec, etc...

you probably have the same problem we had.

You can ask your provider to whitelist the function.

Thanks for the heads up. Would be nice to get this prevented in the future though.