I can't count how many times this topic comes up in Drupal, and I personally have had to deal with a clean way to implement inline images in posts on a ton of occasions. There are a lot of options out there, but I have used this one sucessfully on multiple occasions, and only recently implemented this exact solution on my own blog a few weeks back, and had the topic come up again today with some questions from @susanmacphee.

In Drupal 7, with image field and image cache functionality in core, we may begin seeing many more simple implementations of images inline, but for now in Drupal 6, we are still stuck with some clunky options to make it "simple". Again, please note this is NOT the only way to implement inline images, but I've found it offers the most flexibility for me personally.

The Drupal Modules you will need

• WYSIWYG - offers an API for implementing a variety of WYSIWYG editors including FCKeditor 2.6, jWYSIWYG 0.5, markItUp 1.1.5, NicEdit 0.9.0, openWYSIWYG 1.4.7, TinyMCE 3, TinyMCE 2, Whizzywig 55, WYMeditor 0.5, YUI editor 2.7.0
• IMCE - IMCE is an image/file uploader and browser that supports personal directories and quota.
• IMCE Bridge - This module is acts as a bridge between the IMCE module and the Wysiwyg module.

For the purposes of this implementation, I'm going to assume you already have the WYSIWYG installed and configured with your chosen editor. Instructions on istallation for the WYSIWYG module can be found in this handbook page.