I have met the issue before. I traced it then found I do not install GD2 for PHP. So, installed it by
apt-get install php5-gd
Have another issue is photo been large then 3M pixels, can not build a thumbnail too. because inline-upload.php limit it. I do not know how limited by this value. but I thought too large data transmission is a besetment to someone. I suggest remove it too.
