OK, I figured out a way I can add photos to iWeb. I have to create an album in iPhoto first, put the pics in the album, then add the album to iWeb. Maybe its the way I created the website, but that is the only way I can get it to work. Its kind of a pain since I don't want the photos in my iPhoto library, so I have to delete them when I'm done. But at least it works.
On the subject of photos, I use iWeb and upload to GoDaddy for hosting. I would like to have my pictures separate from the site in iWeb, they are making my domain file huge. What is a good way to host the files somewhere separate from the main site, then I can just link to them off the main page? And I don't need to keep then on my computer all the time either. I was thinking of just flickr or something, but I really don't know the best way.