Hey,
Just thought I'd share this module with you, it's a really great system that makes uploading images into Drupal's text editor much easier then the kinda finniky uploader the WYSIWYG editors have.
Drupal Insert Images Inline

Make sure to watch the screen-cast from the lads at Mustard Seed.
Very nifty and it's lets you use your simple WYSIWYG picture formatting options as well as allowing you to use the brilliant re-sizing on the fly features that Image-cache give you, meaning you won't end up with a big image squashed into a small space, the smaller version of the image is generated and saved as it's own (new) file.
This is the way Drupal 7 is going to handle images in line so as such this module and technique is forwards compatible!
Nice!
After i used the "insert" approach quiet a while (its really simple and _working) i ran into a lot of usibility problems of not really having "inline" context (not beeing integrated in a wysiwyg editor)
This module is filling this gap. http://drupal.org/project/wysiwyg_imageupload
I see you are not using a editor at all, but as this plugin is cross-editor, no editor is required. All you need is the WYSIWYG module, with its api for "non editor" which only provides the buttons and inserts "plain html".
A youtube video about what it is is here http://www.youtube.com/watch?v=LEKpvI1G8qE