A C Zoom

Were all the steps in the README followed? Step 4 for example:
4) Drupal 4.x: Go to administer -> Input Formats, click on "configure" for Filtered HTML (and all other required input formats), and enable the "Link Filter".
Drupal 6.x: administer >> site configuration >> input formats is where Link Filter can be enabled.

You can check if linkfilter is enabled when you create new content, and look at the Input Format section, you should see a line explaining linkfilter, and a link to LinkFilter Tips.