It is the demo application web site: http://www.freerichtexteditor.com/index.php?inc=demo/index
The rich text editor can insert image on it, just like a word document, but the traditional web html form can't add an image on the html form. How this rich text editor work? why it can insert an actually image on the html form instead of pure text? any ideas?
Have a look at designMode, which is what is used in the example you gave.
Here is another example you can pick apart and study.
If your question is, "how do they do that, when you can't add an image to an html textarea", the answer is, the "Design View" is actually a div tag which render's the source. Nothing is actually embedded into anything.
The "source" view is actually what will be submitted when you submit the form.