While taking the time to read through all instructions I got GD Library to work on the server. Wasn't quite as straight forward as documented. Based on documentations on GD Library, the GD DLL was supposed to be there already (ver. 4.3.x).
To be certain I upgraded to PHP 4.3.5 but since not being able to find the DLL in the new package I copied file php_gd2.dll to the \PHP dir. Then uncommented statement in php.ini for the file.
Now avatars/thumbs are working fine for all users