Assets Transform returns "Image cannot be found."
A long shot, but if it is indeed a path problem, this has seemed to help me keep my path(s) straight. I my config.php file, I'll set a parameter for environmentVariables like this:

...

'.dev' =&gt; array(
    'devMode' =&gt; true,
    'siteUrl' =&gt; 'http://mysite.dev/',
    'environmentVariables' =&gt; array(
        'basePath' =&gt; $_SERVER['DOCUMENT_ROOT'] . '/',
        'baseUrl' =&gt; 'http://mysite.dev/',
    )
)

...


Then when you are defining your asset sources, you can use this for "File System Path":

{basePath}assets/photos/products/


Then for URL try this:

/assets/photos/products