NextGEN Gallery Version 1.6.2
As i see, this problem is occurring in 1.7.3 version also.
There is problem with determination of file extension.
For example - you have PNG image, but it is renamed to JPG extension.
Go to "Add Gallery / Images":
If you trying to upload this image, you will get warnings (shown below), and in result image will be wrong uploaded, and you will be not able to edit its thumbnail.
Warning: imagecreatefromjpeg() [function.imagecreatefromjpeg]: gd-jpeg: JPEG library reports unrecoverable error: in /home/webuser/vhosts/vh121/wp-content/plugins/nextgen-gallery/lib/gd.thumbnail.inc.php on line 198 Warning: imagecreatefromjpeg() [function.imagecreatefromjpeg]: '/home/webuser/vhosts/vh121/wp-content/gallery/burton-us-open/curr_cond_bg.jpg' is not a valid JPEG file in /home/webuser/vhosts/vh121/wp-content/plugins/nextgen-gallery/lib/gd.thumbnail.inc.php on line 198 curr_cond_bg.jpg (Error : Create Image failed. Check memory limit)
Or you can download patch here: