Thanks for all the feedback guys :) Keep in mind that I also have to run a business, and also have a social life so in the spare time I take a look at stuff like this ;)
to josh_tuck, i get this error when trying to view the thumbnail:
You don't have permission to access /latest-news/wp-content/plugins/magic-gallery/image.php on this server.
Would you be so kind to try to chmod the image.php file as well? It's a weird issue that I haven't encountered before, especially weird because this file has remained unchanged in the update!
Also, keep in mind that there are differences between servers and systems where magic gallery gets installed into. I can only debug on my own servers, I have both a windows an linux server running with default setups, and my plugin installs like a dream on there. It makes sense that after 10 000 downloads some people experience problems ;)
Lets hope we find out whats wrong so that in the future, less people will experience these issues.