OK, here is an update and verified working solution:
1. Generate CAPTCHA fields in your Contact Form 7 panel:
<p>[captchac captcha-XXX]<br />
[captchar captcha-XXX]</p>
2. Add 3 items:
i. The tag to make this a watermark: watermark
ii. The class to make this a watermark: class:wpcf7-use-title-as-watermark
iii. Default text of your choice: "Enter the characters above"
3. Our new CAPTCHA field should look like:
<p>[captchac captcha-XXX]<br />
[captchar captcha-XXX watermark class:wpcf7-use-title-as-watermark "Enter the characters above"]</p>
4. Now open the file at:
/wp-content/plugins/contact-form-7/modules/captcha.php
5. Find line 103 or the line that reads:
$html = '<input type="text" name="' . $name . '" value="' . esc_attr( $value ) . '"' . $atts . ' />';
6. Change this line to read:
$html = '<input type="text" name="' . $name . '" title="' . esc_attr( $value ) . '" value="' . esc_attr( $value ) . '"' . $atts . ' />';
7. Save your form, save captcha.php, reload your site and enjoy your watermarked CAPTCHA input box that VERIFIES!