Damn that sounds alot more complicated than how I do it :shock:
Not that it's a bad way.... Here's what I do:
Upload whatever image I have to any of the myriad of hosting sites (Photobucket, VidiLife, Youtube, MySpace, etc). Usually when you upload them they put them into a decent format.
If you're a PC user (which I am, so I'll speak from that perspective), right-click on the image and click "View Image". It will then show the image only in the browser window.
Copy the link.
Now, back in the form text, click the URL button. Then, paste the copied link just after the [ URL ] brackets.
Click the URL button again to close the action.
BAM!! Picture in post!
The nice part is that you can link any picture to appear in the posts from the web as long as the image itself has a URL (just right click to see it) AND you can perform the action from any browser... even mobile phone browsers