I have not solved this puzzle yet, but may have some minor insights:
I played with the Wiki and the image insert tool today a bit, and from what I can tell, the upload command works just fine. The images are actually uploaded into whatever folder you desire, and are not munged along the way. If fact, any images a load into this folder using the image insert tool from the Wiki page can be used by other resources in the lesson, and display correctly. It's just in the Wiki tool that the final saved page does *not* show the image.
However, upon hitting the "Save" command, the correct <img src="your_graphic_here.jpg"> tag is *not* inserted. When I hit view source on my browser, all that seems to be inserted is <img>, which renders on my browser as a little default "bad icon". From what I can tell, the Save button invokes the following PHP page on my server:
From this behavior, I wonder if this PHP script is not the source of the problem, and somehow fails to write out the correct name of the image when it renders the final output page.
For what it's worth, the image insert tool seems to put the images in a different place than those put on the server with the upload command at the bottom of the "Edit" page. On my server, the image insert tool puts an image in the following location:
and is *not* visible when the "Save" button is hit. If I try to link to it by typing
the image is *not* displayed.
In contrast, the Upload button at the bottom of the page puts the same image at:
From this location, I can make it display properly on my Wiki page by typing:
I don't currently have time to dig into the wiki/view.php script myself and try tweaking it, but hope that these minor insights are helpful to someone else.