Solution:
1) Open /wp-content/plugins/nextgen-gallery/lib/gd.thumbnail.inc.php with a text editor (e.g. notepad)
2) On line #168 un-comment (remove the //) from before @ini_set(‘memory_limit’, ‘128M’);
3) Save and upload changes
4) Delete image/s that failed to generate a thumbnail and re-upload using NextGEN Gallery’s standard Upload Images feature