I dont know if any of you are familiar with XenForo, but the way it handles image attachments is superb.
Essentially, you upload your file via a ajax/jquery widget, it by default creates a thumbnail, and you can click "insert full size" or "insert thumbnail".
It then adds a tag like [attachment]12993[/attachment] to the post (this makes it easy for you to move the image around where you want it to be displayed).
This would allow you to have images in the actual document itself a lot easier than is currently possible
