Hi ivorpad,
Have you checked that the cache folder inside wordpress-popular-posts/scripts is writable by your local server? I've seen that Xampp, for example, makes all folders read-only by default (or maybe its Windows' fault, can't tell for sure).
Also, wanted to thank you for your suggestion. I've checked the documentation and while it does seem to be a good idea, it also requires people to include add_theme_support( 'post-thumbnails' ); to their theme's functions.php file. This is not difficult per se, anyone can do it, however it would add another prerequisite for using my plugin.
It would also require the user to go back to each of their posts and select a thumbnail (if they haven't done so already) which can be a royal pain in the butt for blogs with lots of posts. Not sure if anyone is willing to do that.
Don't take me wrong, though. I do believe your idea is great. Actually, it would allow me to remove the timthumb script that WordPress Popular Posts uses to generate the thumbnails and leave that work to WordPress and the blogger alone. That'd be a real relief for me :P
Right now I've just got a few ideas that popped into my mind. If I can make them work with my plugin and also make it so that this feature won't disturb current users of the WordPress Popular Posts plugin then I'll be a happy man ;)