Just leave ‘template directory’ as it is, thats a standard reference to your theme, you dont need to edit it.
it shouldnt matter if the images are in an assetts folder,
i tested by instertng an image through the html editor stored in an assetts folder, like
themename/images/assetts/myimage.jpg
as long as the image is in the post it should still be found.
this what i used to show the first image if no feature image was set up, im also using tim thumb to create a thumbnail, but ignore that bit if not needed, you should be able to see i’ve placed the call to ‘catch_that_image’ in a div just before the excerpt, athough you could put it any where in the loop
<div class="thumbTest">
<?php if ( has_post_thumbnail() ) {
the_post_thumbnail();
} else { ?>
<img src="<?php bloginfo('template_directory'); ?>/scripts/timthumb.php?src=<?php echo catch_that_image() ?>" alt="" />
<?php } ?>
</div>
<div class="entry-content">
<?php the_excerpt(); ?>
<?php wp_link_pages( array( 'before' => '<div class="page-link">' . __( 'Pages:', 'twentyten' ), 'after' => '</div>' ) ); ?>
<?php edit_post_link( __( 'Edit', 'twentyten' ), '<span class="edit-link">', '</span>' ); ?>
</div><!-- .entry-content -->
<span class="comments-link"><?php comments_popup_link( __( 'Leave a comment', 'twentyten' ), __( '1 Comment', 'twentyten' ), __( '% Comments', 'twentyten' ) ); ?></span>
</div><!-- #post-## -->
hope that helps