I have the same problem. Unchecking the “Crop thumbnail to exact dimensions” box does not help.
If I choose change image and choose an image from the media library, choose actual size and then insert into widget then the image appears to be right when first inserted. As soon as I click Save for the widget the image is cropped on its height but not width. It seems to be cropped to 190px – I’m not sure where that is coming from since my thuimbnail size is 150×150.
The HTML for the image, after inserting and before saving is (according to Firsbug)
<br />
<img width="240" height="269" class="aligncenter size-full wp-image-13425" alt="" src="https://birka.recdev.adamc-ubuntu.cybertron.local/files/2013/06/taxfreekatalog-janmar2013_240.jpg"><br />
After saving the html becomes
<br />
<img width="240" height="190" style="max-width: 240px;max-height: 269px;" alt="taxfreekatalog-janmar2013_240" class="attachment-240x269 aligncenter" src="https://birka.recdev.adamc-ubuntu.cybertron.local/files/2013/06/taxfreekatalog-janmar2013_240-240x190.jpg"><br />
240×269 is the right dimensions for the full-sized image, but what I get is a 240×190 cropped image. I’m not sure where the 190 comes from.
I’d rate this as a fairly urgent bugg – at the moment we cannot create or edit image widgets which don’t look crap because of this bug.
Edit: Should have said: I’m running WP 3.5.1 and ImageWidget 4.0.7. I’m running in network mode (not that I think it makes any difference). i do have two other plugins installed which can affect image handling: NextGEn gallery and Easy Fancybox, but this problem happens when I upload an image or choose it from the ordinary media library so i don’t think they are related. Also, the problem seems to be not when the image is inserted into the widget but when the widget is then saved. We have run with both these plugins quite a while and the image widget used to work. i think (but cannot be 100% certain) that it was in connection with the upgrade to 3.5.1 that the problem came.