I've written a patch against this module that allows users to select a view to use for setting images for a taxonomy term. My use case for this is image galleries, and allowing the users to set the default image using a cck field on the node and filter on that field.
It depends on the embed_views module.
Below are also instructions for how to create a view to use with taxonomy image:
Step 0: Install the <a href="http://drupal.org/project/embed_views">embed_views</a> module.
Step 1: Create a new view of view type 'node'
Step 2: Set the following settings on the view
Row style: Fields
Items to display: 1
Use pager: No
More link: No
Step 3: Add a field to the view - note that this field should be the image to be displayed as the term image.
Select the format 'Path to File'.
Set the label = None.
There should only be a single display field in this view, if you need to add other fields for whatever reason, set their "Exclude from display" flag
Step 4: Add the filters you need
You'll probably want to add a filter on the "Taxonomy: Vocabulary" as well.
Step 5: Add an argument 'Taxonomy: Term ID'
Step 6: Add a new display of type "Embed" and save the view.
Step 7: Configure taxonomy image
In site configuration -> taxonomy image check the box 'Use a view to select the term images' then select the view you just created.
You may need to clear your cache for the images to show up.