Looks like a problem with Pillow, the library that generates the thumbnails. Make sure you have installed the system-wide requirements defined in the installation page of the docs. After that, try reinstalling Pillow in your virtualenv, or creating a new one just for good measure.

http://mezzanine.readthedocs.org/en/latest/overview.html#dependencies

Another user seems to be having similar issues, and the investigation going on in this thread might be useful: https://groups.google.com/forum/#!topic/mezzanine-users/kNk1syn_FaI

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