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if i run this from console (exact copy/paste from above in WinXP Pro SP2) it all works well and generates the thumbnail. But it will not generate it from web page.
it's very likely a run permissions issue between your server and windows. If you server is running as a service, it's not being run as you, so it doesn't have access to your environment. You may need to set the service to run interactively with the desktop, this can help.. using the full path to ImageMagick will also probably help..