At Brads suggestion I was able to generate captchas with bin/ljmaint.pl gen_image_captchas. The 500 blogs get generated in var/blogs.... and the reference entries for the 500 captchas get created in the database.
I am running with USERPIC_MOGFILES = 0;, USERPIC_BLOBSERVER = 1; and the default BLOBINFO that gets created in ljdefaults. I tried to run to the database by setting USERPIC_BLOBSERVER =0; but that din't work either.
My default capability clase is 2 (5 userpics), and that is making its way into the user table in the database when I add new users.
I have tried everything in the fields URLS, huge pic files (to try to get a error), files that worked when uploading to www.livejournal.com, no keywords, many keywords, comments etc. but still get nothing more than a flash. When the page first comes up the page is:www.mylistt.com/edicpics.bml#upload after hitting proceed it comes back as www.mylistt.com/edicpics.bml.