I did go to the Network Admin settings and set those up. They are correct. Andrea - The problem is - when you click on the Add an Image button (in multi site) and attempt to embed it, it makes it an attachment no matter what:
<a href="http://www.vennervox.com/you-take-the-good-you-take-the-bad/jobless" rel="attachment wp-att-4121"><img class="aligncenter size-full wp-image-4121" src="http://www.vennervox.com/files/2011/07/JOBLESS.jpg" alt="" width="149" height="214" /></a>
If I go to a site that is NOT multi-site and do the same thing, it embeds it properly:
<a href="http://www.davidwarnerstudio.com/wordpress/wp-content/uploads/2011/07/IMG_6776-Edit_iPad.jpg"><img class="size-medium wp-image-1081 alignright" title="© David Warner Studio" src="http://www.davidwarnerstudio.com/wordpress/wp-content/uploads/2011/07/IMG_6776-Edit_iPad-300x160.jpg" alt="" width="300" height="160" /></a>
Both images were imported exactly the same way, both (looking at the code) are inserted entirely different. I don't want them as attachments - I wanted them embedded!