Image Attachment Problem

Here is what I’m trying to figure out.
1) I upload an image through the media libary, or already have uploaded it once before.
2) I make a new post, and try attaching the image with the upload/insert panel, and then the media library tab.
3) After choosing “insert into post” the html is added, but wordpress does not recognize the image is attached.

If I go back to the media library it does not show as attached, if I try using a [gallery] shortcode it does not work, and it doesn’t work if I try calling it in my theme with get_children(array('post_parent'=>$thePostID,'post_type'=>'attachment','post_mime_type'=>'image','order' => 'ASC'))
and
wp_get_attachment_image

I had high hopes that this problem would be fixed with 2.8, but I’m at the breaking point. Am I the only one who sees this as a major flaw with image “attachments”