The message "this set is hidden from students" is not an error message. It is an informational message indicating that the set has not been made available to students (you need to use the Homework Sets Editor to make it visible, even if the open date is already past).
As for the image situation, it sounds like you have a problem with the configuration of your system. The "images" mode uses external programs (LaTeX and dvipng to name two) and if these are not properly configured, image mode won't work. Check that the paths to the latex and dvipng executables are set correctly in global.conf (and that these programs are actually installed on your server).