The only options I am seeing on the Lazyest Gallery settings page are Main Gallery Options and Utility Functions. I put some pictures in a gallery folder, the folder is visible but not the pictures. I get the file alert png both on the gallery page and using the slideshow widget.
I am using WordPress 3.1.1 and the TwentyTen theme on localhost. I have tried it on two different installs, one with a fresh database and no other plugins activated and I get the same results.