Having <img src="website"> is a much cleaner way to do it for me. Copying and pasting hasn't worked at all. The only other option would be to upload the pictures to CYS but there's a limit on the size of the photos/size of the file/etc. At least with photobucket it was a lot more convenient, since I have folders dedicated to their separate stories on that website.
Right now I'm just in a state of confusion since placing new pictures in storygames is going to require a whole new process, unless I'm wrong and it's just a bug.
Another problem I noticed is that if you're in the Storygame Properties, and you select an uploaded picture and then save out. The page refreshes, causing the image to completely disappear. This requires you to go through a never ending loop of selecting, saving, and refreshing, while never seeing your picture.
The photobucket method doesn't work at all.