But then how do I let them add an image to their post?  Maybe we are talking in circles here...

I want the user to not be able to upload anything, but to be able to display an image in their HTML content.

I have disabled the ability to upload, but when they hit the Insert Image button it displays the dialog with the upload area grayed out, along with the two directory boxes at the top of that dialog.  I'd really just prefer a window popped up with a few options:
1. Image size (if blank then the full size of the image should show).
2. Alt text.
3. Link to image.