This problem has been asked about and talked about in the forums and the issues area for image.modules extensively. This issue thread was the most recent and I have also posted this in that thread. If you are not sure if your symptoms fit this resolution or not please check there for a description.
For all of those who have tinkered and toiled with this, I have solved it for myself and I believe this will help others. Please note that this is on a Linux Installation. I do not believe it applies to windows users.
OK, so I was having the same problem as everyone else. Using ImageMagick in the image.module. There is an upload of the image as a temp img but no thumbnail creation and therefore no successful uploading of images into the database.
This was so hard to fix because it is TWO separate issues that give the same symptoms. Some may be suffering from only one of them, but from the postings I have read (this is a really wide spread issue) many seem to be suffering both.
****actual answer starts here****
The fundamental issue is that PHP is set to not allow execution of anything via the exec() command unless it is in a specified directory in the php.ini file (safe_mode_exec_dir). Mine was set to /usr/local/share/php/bin/ so it couldn't execute the convert command because it wasn't in there. I made a symbolic link from the actual install point to that directory. (ln -s /usr/X11R6/bin/convert /usr/local/share/php/bin/convert). Then PHP was able to successfully run the convert command. But the problem still persisted. I then tried the suggestion on many of these threads to comment out the $source = _image_escape_shell($source); and $dest = _image_escape_shell($dest); lines in the _image_convert function in the image.module file. These seem to cause a problem with the exec() command and should be tested and updated.
****End answer****