Hi David,
There still are a number of problems with HTML formatting in the Lesson activity. Some issues have been solved and some other are pending. I agree with you that in the Teacher's Grade Essays view, Essays should display with their full HTML formatting, including images, etc. as they do on the Detailed statistics page.
I will try to find my way through the various issues reported in the tracker about this problem and report the problem and a solution.
In the meantime, if you have an admin access to your moodle site and are willing to do a small hack, here is a workaround (for moodle 2.4).
Edit yourmoodle/mod/lesson/essay.php file, line 398, replace:
$data->studentanswer = format_string($essayinfo->answer, $essayinfo->answerformat);
with:
$data->studentanswer = $essayinfo->answer;
Joseph