Cookies have to be enabled in your web browser and not blocked for the blog web domain. In version 1.7, I added the feature to check for the cookie.
Before version 1.7, a blocked cookie would cause a user to be confused as to why the captcha would always return the error "you entered wrong CAPTCHA". The cookie check prints the error to indicate what might be the actual problem.
The cookie check is working fine for me, so before I determine that anything is wrong with this feature, please reply with more information:
Check your web browser settings and make sure you are not blocking cookies for your blog domain. Did you just install this plugin or were you using it prior to version 1.7?
Can you uninstall version 1.7.x, then manually install version 1.6.9 and test that the CAPTCHA works and that you can post a comment when not logged as admin(type the captcha letters)
http://downloads.wordpress.org/plugin/si-captcha-for-wordpress.1.6.9.zip
What was the result of your test of version 1.6.9? Did it work?
if yes, I have broke something.
if no, your browser is blocking or you have another plugin that is improperly setting a session before header output (in that case I would like to help you further to determine which one)
I can tell you that the plugin called "Shopp" is not compatible.
Your answers to these questions will help me rapidly determine what could be the problem.
Thanks for helping me help you.