Did you guys go to the forum permissions and enabled image uploads? By default they won't be allowed for users. Go to Administration -> Forums -> Edit (Next to one of the forums you want users to upload to) -> And Enable Image Upload for groups that need it.
fu: Try accessing <uri of your forum>/include/phpThumb/demo/phpThumb.demo.demo.php
At the top of the page there will be a note that will tell you if GD lib installed on your server and what version it is. Ideally, you want to see something like this: "Note: this server is working on GD 'bundled (2.0.28 compatible)', so images should be of optimal quality." If you get a different message, you may need to contact your web host and see if they can help you there.