Handcent is working fine for me - led blinks red as I've set it, correct notification plays.
Make sure you turned off notifications in the stock app, and review your notification settings in handcent. could try uninstalling/reinstalling it.
The only issue I'm having w/Handcent is that the notification dialog won't appear when my phone is locked, even though I have it set to appear when the phone is locked. Works fine when the phone is unlocked...when locked all I get is the text notification ticker in the notification bar at the top.
Worked on my D1, not working on D2.