I logged into my server via FTP and moved the active CAPTCHA plugin to another temporary folder. Then I went back to the browser, refreshed the page and proceeded with the password reset. This time everything worked perfectly. I adjusted the settings for LSS to hopefully reduce the chance of this occurring again.
Then via FTP I moved the CAPTCHA plugin back to it's original location. Then (back to the browser) I checked it's settings and I noticed that it had an option to "Enable for lost password". This has to be where the weirdness ensued, because it was expecting a response to the CAPTCHA. However, none was displayed so naturally it was failing everytime. I unchecked this option.
The name of the CAPTCHA plugin is Enmask Captcha. I have been using it because it works very well with portable devices. While messing with this issue I happened to notice that it has not been updated since November 2011, it may be time for me to investigate other options...
Here is the link to the Enmask Captcha plugin page.
Thank you for your time and valuable suggestion!