Adam,
What browser are you using? This is not working for me. Here is what happened when I follow these steps. I am not even trying it out on my own server anymore. I tried your online demo both for php and asp and the same thing is happening. The image is getting inserted at the top of the table. If I click the 'Image Gallery' then the image gets inserted in the right spot. However, with the 'Insert Image' dialog it's completely getting stuck at the top of the table. Here is the resulting code after I tried this on YOUR online demo:
<img height="604" alt="" src="http://cutesoft.net/uploads/el angel caido madrid.jpg" width="453" border="0" />
<table cellspacing="4" cellpadding="4" bgcolor="#ffffff" border="0">
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<p> </p>
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<p>When your algorithmic and programming skills have reached a level which you cannot improve any further, refining your team strategy will give you that extra edge you need to reach the top. We practiced programming contests with different team members and strategies for many years, and saw a lot of other teams do so too. </p>
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<p><img height="52" src="http://cutesoft.net/Uploads/PH02366J.jpg" width="80" alt="" /></p>