After making more research on some suggestions, I have installed Entropy PHP 5.2.9 to my Apache2 server (running OSX Server) and the problem with the image not displaying was resolved, the audio is working too.
what is Entropy? Can it be installed on Linux Server?
**edit** I just found out that Entropy is just the PHP installer for Mac OSX Server. I'm already up to 5.2.9 on Limux server - not sure what else could be doing it. What kind of research lead you to install Entropy 5.2.9?
One of the things I reviewed was the GD Library, although Captcha validates this and gave me green, I was not sure if this was OK, since by default was not included on OSX, and I built PHP with GD library to get it to work within Joomla.
With PHP 5.2.9 GD2 Library was included and now the images are displayed, the only thing I have changed was PHP installation, since all the other tips like directory permission settings, etc. were correct.