@stevenew: I sadly could not reproduce it with Safari. I get a normal image inserted. Actually it can not really matter what you select before choosing an album because whatever you set before that is reverted to the default values since the page is reloaded then. Strange...
@acrylian, I have tried it again and can reproduce the 'no image and disappearing text' using the above sequence every time, in fact to get the image to appear I must always use the sequence of, choose album, change 'Link Type' and/or 'Text wrap' then select the imager. Choosing the image last is the only way it will appear and the text not disappear in the editor.
Oh well I seem to be making a habit of finding problems no one else has...
I just checked it on Firefox 3.0.3 for mac and don't get the problem (I do get different text wrapping though, text wrap right seems to drop the text bottom right of the image, on safari it stays top right).
So it must be something with my system and safari, Im on 10.4.11 ppc.