Nick, could you be so kind and paste in this thread the link to your blog post where this issue is addressed?
I have tried the recipe found at
www.joomlapolis.com/component/option,com_joomlaboard/Itemid,38/func,view/id,40463/catid,7/limit,6/limitstart,132/
but it did not work either.
All i know is that i had the plugin working properly and all of a sudden it ceased to display the images.
At first i though it could be SEF related, but after turning it off, the problem persisted.
only thing i can think of is some language or template change that has placed garbage chars in your headers.
This could cause the image generation process to fail.
I have a version 2 of the captcha plugin ready and it fixes this specific type of problem (makes image generation independent of template or language files) but it has problems when viewed from a PC that has mcafee security installed.
I will not be able to release until this specific problem is resolved.