Yes i'm having the exact same problem. IH2 admin works fine but it doesn't actually create the images in the medim and large image folders hence dead links on website for medium and large images. IH2 is not compressing the thumbnail either. I'm using zen 1.3.7 with GD libraries and image magik enabled. Is this an issue with 1.3.7?

please help as IH2 looks like a great thing when it's working.