Further to my last post I have done some digging around and found, that by changing from the WYSIWYG editor to 1.5 style editor via your admin panel ‘users’ then ‘your profile’ and under ‘personal options’ at the bottom of the screen un check the ‘Use the visual rich editor when writing’ box. This then gives you the old style write page with link boxes. Click on img box enter full URL of your image. Next box enter description of image for alt tag.Click ok and in goes the link. You could also under admin and then options and then miscellaneous change to full URL of where you want your image files stored. The default is wp-content/uploads.
This works well for me.