Hi Neo or Tree-Hugger,
You know I just stumbled across this. Is this true?
TinyMCE:FAQ - Moxiecode Documentation Wiki
"How can I upload image files from my local computer?
Short answer: You can't!
Long answer: TinyMCE is just an editor to output (X)HTML code. It is by no means comparable to web editing desktop software such as Adobe Dreamweaver, Go Live! or Microsoft Web Expressions and the like. It runs on a user's browser (client-side) and not on a server. If you want to upload pictures to a server then you need a server-side component to process your image files. TinyMCE can't do that on its own since it doesn't run on the server but on the user's browser.
However there are two commercial plugins that enable you to upload files since they come with a server-side component. These are MCImageManager and MCFileManager.
In addition, there are two Open Source plugins which accomplish this same purpose. These include IMCE and Ibrowser. Note that these are both released under the GPL, which may not be acceptable for many commercial applications.
TinyMCE is a front-end for systems that need a client-side WYSIWYG editor (like many CMSes do). You can see it like an independent component that can be integrated into an existing system."