Found a solution on the Joomla forums that solved both the Thumnail creation problem and the Fatal Error: Allowed memory size...exhausted...
The problem was the memory size settings in the index.php files in Joomla.
"Fatal error: Allowed memory size of 8388608 bytes exhausted (tried to allocate 6144 bytes) in C:\AppServ\www\joomla-1.0.14\administrator\includes\menubar.html.php on line 463"
Solution:
Added the line: “ini_set('memory_limit','40M');” (make it the second line in the file (just below “<?php”))in the following files:
index.php and the index2.php file in the main Joomla root folder, AND,
to the index.php, index2.php, and the index3.php (if you have a 2 and 3) files under the Administrator folder which is under the root folder
Used FTP (FileZilla) Client: dragged file from rightside to “desktop” on left side; rt clk on desktop>open with Notepad; add line; save; then drag back to original file on rightside and overwrite. You may be able to just right click the file on the rightside (server) and edit. For some reason I have to open it from my local hard drive to edit in Notepad.
the "40M" in the new added line is the memory size limit listed in my php info under Joomla backend "help". You can make it a different number.
After these changes I could now access my "Images" (gallery), upload in frontend, and create thumbnails.
