See the question and my original answer on StackOverflow

For intensive server-side code, I suggest you use other techniques than GDI+ that has not been designed to handle images chunk by chunk (in a streaming manner).

You can use Windows Imaging Component or WPF for this task. There is a very good example on how to do this in a fast and - more important - scalable manner here:

The fastest way to resize images from ASP.NET. And it’s (more) supported-ish.