A lot of people are having trouble posting pictures and using LJ cuts... hopefully this will help.
RICH TEXT mode looks like this when you post an entry:
Under this cut is a tutorial of how to post a picture.
It doesn't matter what site you've uploaded your picture to (imageshack, photobucket, flickr, tinypic, etc.), as long as you use the DIRECT LINK URL.
Click on the INSERT/EDIT IMAGE button.
This window will pop up. PASTE the URL you just copied into the URL box.
Ta-da, your picture appears.
Now that your picture is there, make a LJ cut.
HIGHLIGHT your picture.
Click the LiveJournal Cut button.
This window will pop up. NAME your LJ cut.
The gray box means the LJ cut is in effect. You're ready to post your entry now.
You should use a LJ cut when your entry is long, or when posting a picture.