Ok now I have tested the other way if you have uploaded the picture to dreamwidth, go to your image management page "http://www.dreamwidth.org/file/list" and copy the text from the image embed box which will look something like "img src='http://arachnydsweb.dreamwidth.org/file/317.jpg' alt='My son and his baby' title='Hello Daddy' and paste it into your post when you have the html tag on for posting.

Even better in my opinion just copy the image location "http://arachnydsweb.dreamwidth.org/file/317.jpg" and use the little picture button as my previous comment and post that into the URL box and press ok.

The quote marks are for ease of reading only