with image handler there is no need for the MED or LRG images anymore cause IH will take care of the naming when resizing.
Did you look inside the bmz_cache folder to see if there are ANY other folders living in there...if so then delete them, maybe that will make IH take over.
In the main cache folder are there any files in there? Maybe the store sent you an error message in there.
your images that you have in the store...are they are small ones, when I clicked on the stick horse the lightbox showed a tiny image. IH2 you upload the largest size you want and it takes care of the rest. It also does not seem to show the popup on all your images like on the products page where your category images are...some have the hover and others do not so maybe the settings area is off too.
you may have to have someone come in to your server files and store backend to see what's up
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