How I configured it
I followed the instructions on the "HTML Editor getting started guide"
First, I created a folder in the same directory where my editing pages reside. I changed the permissions to allow write privileges.
Using an existing DB insert page (constructed with DataAssist) that already inserts properly, I replaced a form field by inserting an HTML editor with the same name.
I checked to allow file upload in the "general tab"
I removed many features in the "tool bar tab" to simplify for my client.
Clicking on the global upload button, I selected the above mentioned folder for image upload.
Uploaded the page to the server, along with any other files changed.
Let me try starting with a fresh form page, and go through the process again to see if I run into the same problem. I'll get back to you.