yeah - I wasn't getting a lot of definitive answers on why this wasn't working either. let me try to fill in some gaps.
I am using ipowerweb for hosting and ran into that memory limit issue you mentioned. I scaled my large pictures down from 2048x1536 to 1024x768 at 72 dpi and re-uploaded 6 of them. Now those thumbnails showed up in the Gallery > Manage Gallery page. I had more confidence. I uploaded all the new resized images. I went to Gallery > Manage Gallery > Edit > and clicked the 'Scan folder for new images' button. It got to about 45% and just hung, showing me "Create new thumbnails. Running...please wait". I tried it again and it got to 47% and hung. So now I'm thinking that we're looking at some other mystery limitation, and I need to more than halve the number of images in each gallery, or this won't work.
Hope this helps. I've read tons of posts on how it doesn't, and read no real answers. Maybe documentation will be forthcoming, as I liked this plugin's interface the best.
And just a little note to everyone else... Don't just post again and say, "Oh, nevermind, I figured it out". If you post a question, post the answer or delete the post. Thanks!