Now I'm just confused.
Me too. Here's where we started:
I installed a local version of my blog. Everything seems ok, except the images.
1. The images on the local version are pointing to the images on the live blog.
2. The images that were designated as "featured image" for a post, are not showing up at all.
All of that is simply due to the fact that all of the references to all of your images, and all of the information attached to those images that was created from, or edited while in your media library, are stored in the database, and still point to the domain name for your live site.
The solution is to do a search and replace on the database, trading old domain name for new location. There may be file and directory permissions to consider, but until you actually edit the database to properly reflect the new location, I think you're going to you have a difficult time troubleshooting any other image related issues.
But shouldn't this link bring up the image: http://localhost:8888/wordpress/wp-content/uploads/2011/10/Puff-Pastry-Honey-Nuts.jpg
If the image exists at that exact path, with that exact name, and its location is completely web-accessible, and you put that absolute path to the image in your browsers address bar... yes, it should be viewable in your browser.