Here you go, this should fix your issue and remove another issue while we're at it
This also removes the larger Captcha Security Image after the user has logged in. I'll chagne this and code it up a little better when I get home from work.
This works great for now, but I like to be able to configure all options in the Admin Control Panel. Right now it's hard-coded to remove the Captcha for uploading an image after the user has logged in (if they are logged in than why continue to use Captcha

).
On the KrazyImage homepage I enabled user login to upload images.
The test account is...
User: test
Password: test