It's fine after a reset.
What happens is this: if you disable the CAPTCHA and log out, without resetting, then you no longer get a textbox in which to enter a CAPTCHA code, but the login function still expects to be passed a CAPTCHA code, so authentication will always fail.
After a reset, the login function no longer expects a CAPTCHA code.
In other words, disabling CAPTCHA should either (a) require a reset, or (b) trip a boolean within the login function so that it doesn't attempt to authenticate using a CAPTCHA code. I'd imagine (b) would be preferable.