Okay, this is strange. The issue is resolved. I was about to conclude your findings with the captcha. However I have another site with a JB template, this is the link: http://www.product-adviser.com/ and everything on that site works fine, registration etc. There was only one difference in the setup and when I applied it to the Tell Annie site, the registration worked with a Gmail test account.
In the Global Configuration->Users->User Options Tab, I set the 'Send Password' to Yes, so that upon registration the user receives the password they entered. And it worked. The registration page now works. Hopefully this extensive time consuming effort helps someone else.
Solved.