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well I assume the error is 127? or is it 1?
I would suggest that you do two things.
1. FTP to your server and CHMOD your uploads and data folders and every subfolder at every level of those directories to 777
2. Double check that you truly have mogrify where you are saying it is. An easy test is to go to Admin => Global Options and set your processor to GD2 and see if you can upload. If this is the case if you have shell access to the server you can sign in and type whereis mogrify to see the path it is installed otherwise you need to contact your host and see if it is installed.
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