Got this reply from the creator of the plugin:
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I took a look at your site for you. For anyone, like Vince, using the
K2Reloaded theme, there’s a rule in the CSS for that theme that is
causing some problems.
Take a look at the rule for “.primary img”. If you remove the
“max-width: 100%” style, the problem goes away. I think that code is
designed to shrink oversized images in your posts to fit into the
content portion of your page. Unfortunately, it’s also shrinking your
thumbnails to fit into those little gray boxes I contain them in.
I’ll take a look to see if there’s anything I can do on this end, but
that rule is pretty strict and would likely have adverse affects on
images in many circumstances.
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hope it helps other people as well