you should select the image tag in the tag inspector before inserting image resizer.
the code generated should be around the image tag, it looks like you may have had the more than the image tag selected. change the code to:
<li class="formItem">
<div class="formGroup">
<div class="lineGroup">
<div class="fullColumnGroup">
<div class="errorGroup">
<div class="fieldPair">
<div class="fieldGroup">
<span>
<input name="fieldPicture" type="file" id="fieldPicture" size="30">
<label for="fieldPicture" class="sublabel" >Picture</label>
<br>
  Current image (leave picture field blank to keep this image): <?php
if(TRUE){ // Begin Cached Resized Image: ImageCacheInstance_1343324518405
ob_start();
?>
<img src="../../folder1/folder2/<?php echo $row_WADAtablename['fieldPicture']; ?>" width="100" height="100" alt="<?php echo $row_WADAtablename['fieldModel']; ?> Image"><?php
echo(getCachedResizedImageHTML(ob_get_clean(), "../../folder1/folder2/thumbnails", "proportion", "", false));
} // End Cached Resized Image: ImageCacheInstance_1343324518405
?></span> </div>
</div>
</div>
</div>
</div>
</div>
</li>