Hi Chris,
I spotted this issue with our wikis recently too, but I think I've worked out the problem. Would I be right in guessing that students are searching for images on google, then copying the address to insert into the wiki? That was the problem on ours, because that address isn't actually the path to the picture itself. It seems to work for me if I take out just the image path and use that, getting rid of all the Google junk.
eg.
http ://www.google.co.uk/imgres?imgurl=http ://moodle.com/stuff/moodle-desktop-1024.jpg&imgrefurl=http ://moodle.com/stuff/&usg=__OvyqkI3LK8P7TkfbLBQ7d6SfcZA=&h=768&w=1024&sz=132&hl=en&start=0&zoom=1&tbnid=CUOL_l3UEtbMvM:&tbnh=133&tbnw=163&ei=57CMTa-CHZmAhAfonPipCw&prev=/images%3Fq%3Dmoodle%26um%3D1%26hl%3Den%26safe%3Dactive%26sa%3DN%26biw%3D1280%26bih%3D847%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=121&vpy=515&dur=2286&hovh=194&hovw=259&tx=144&ty=91&oei=57CMTa-CHZmAhAfonPipCw&page=1&ndsp=30&ved=1t:429,r:18,s:0
Unfortunately that's a bit fiddly for students - I'm sure there used to be the option to view the page the image is from, but I can't see that anymore..