I upload all my images to the /images folder, and i have no problems. i just ftp them all up at once, ih2 finds them no problem.

i would be there all day if i uploaded each image....

I did at one point have the issue you are having, i fixed it by UNINSTALLING ih2 in the admin control and then reinstalling it. I have no idea why that worked, but it did. as i recall it took twice doing that.