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The spell essentially makes you look like you're 2 hexes away from your actual location. How does this affect your ability to catch opponents off-guard?

Well, you can't be seen for all intents and purposes (whether or not hearing/smelling/touching come into play depends on the situation).
As it hints at, you're invisible, and that means your attacks can't be avoided, you're effectively blindsiding the opponent, even if he hears you he gets Full Darkness on attempts to attack you, and even if the spell is disbelieved you might get a surprise round because you're suddenly some place else (disbelief doesn't mean you're automatically spotted in your real location, at least as far as I understand it). Some of these depend on actual location, though (because it's 2 hexes, you could be on the other side of the opponent from your image, or on the same side and simply further back, or it could be sideways).

That all makes sense. I just wanted confirmation since that sounds a little broken for a 1st Circle spell.

It can be used for the classic "Muahaha, I was behind you all along, Fool!" or the ninja shtick of leaving behind a log (sometimes dressed as a ninja) when they get hit in order to distract and appear behind the target.

There are many other creative uses for the illusion, but the stickler is that the caster HAS to concentrate in order to make the illusionary self "react convincingly"... otherwise the illusion messes up somehow (the bade goes whistling through his face) and everyone gets a Disbelief test.

Other uses include holding an audience while actually hiding behind a screen (the Wizard of Oz gimmick).. possibly combined with Monstrous Mantle if you need your illusion to get offensive. Also, there's no reason why other /illusion/ tagged spells can't be made to come from the Displaced Image, instead of your true location. (Whereas the "True" flavored versions would come from your true location).

As a first Circle illusion, it is extremely easy to sense or disbelieve. Basically, it will be good for one attack, or defense, and then it will be gone (for that character). That one attack might buy you enough time to do other things, though.

It's not worded perfectly, but from the way the rules handle these things, the fact it's mentioned tells us it's out of the ordinary (you can always Disbelieve, it wouldn't require mention, condition of Concentration or not).

I've always GM'd it as your image is displaced several yards but it still reflects what your are doing. IE: it doesn't make you invisible. Sure you can get a blind side attack to your opponents but they can still see you making the attack, and thus attempt to dodge/parry it (with a penalty equal to the caster's Spellcasting Rank)

If the image is "hit" by an attack (but not broken by attack result achieving Sensing Difficulty), I call for the PC to make an Acting skill test (default to CHA) against the attacker's Social Defence. If this fails, then the attacker can get a free disbelief test (1 Strain). If they fluff it on a Pathetic result, then the illusion is broken for that attacker.