Using locally on XAMPP (latest version), WP 3.4.2, W$7, in preparation for migration.
Upload/Insert pressed, image added to upload directory, media > show > insert into post. Nothing added to WYSIWYG display.
Then located through Upload/Insert URL, HTML and included image manually > update. Image displays in editor. Saved... Image did not display on site.
I followed this by making a simple text change in WYSWYG window without removing 'inserted. image and saved. Site did not update.
Widget appears to be broken. I hope this is fixed as this widget would be very, very useful.