Kevin,Nope, my box doesn't look like that. As soon as I click the Insert Image like your first image the popup box looks like your third image. I don't get your second image.
I tried it in IE and Firefox but still don't get that above popup box to show.
Try this to see if it helps. After you click on the Insert Image icon and the Insert Image dialog box pops up, click on the From URL tab instead and check to see if the Retrieve Remote File and Reference Locally option is checked.
If it is not, check it and then select the From Computer tab and attempt to load a pic file to a posting.