I have solved the problem, here is the new version of the code that works. Sorry, no screen cap this time.
import SimpleCV
from SimpleCV import *
display = SimpleCV.Display()
cam = Kinect()
normaldisplay = True
while display.isNotDone():
if display.mouseRight:
normaldisplay = not(normaldisplay)
print "Display Mode:", "Normal" if normaldisplay else "Segmented"
img = cam.getDepth().flipHorizontal()
img2 = cam.getImage().flipHorizontal()
dist = img.colorDistance(SimpleCV.Color.BLACK).dilate(2)
segmented = dist.stretch(200,255)
binar = segmented.binarize(200)
erode = binar.erode(2)
blobs = erode.findBlobs()
if blobs:
circles = blobs.filter([b.isCircle(0.2) for b in blobs])
if circles:
img.drawCircle((circles[-1].x, circles[-1].y), circles[-1].radius(),SimpleCV.Color.BLUE,3)
if normaldisplay:
img.show()
else:
segmented.show()