Sorry, it seems that the change we have to make is in the HTMLEditor folder.
in the HTMLEditor Folder under editor/plugins/kfm and open the configuration.php file.
Then change this line of code:
$kfm_userfiles_address = '../../../../'.$WAGLOBAL_images_folder;
$kfm_userfiles_address = '../../../../';
and change this line of code:
$kfm_userfiles_output = $WAGLOBAL_images_folder . '/';
$kfm_userfiles_output = '/';
note, this implies that you won't be able to use the settings tab to set your images folder. it will always default to the root.