I have the same problem.
It seem that latex2html writes to image.tex the lines with
\includegraphics{fig.ps}
but not 
\usepackage{graphics}
so later LaTeX in non-stop mode skips unknown command and leaves only
the text "fig.ps", instead of the picture.  And obvious 
$DO_INCLUDE = 'graphics';
in .latex2html-init does not help, unlike documentation states.

So images generation is correct, but where is the bug?

Vadim

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