In one of my projects I integrated CKEditor with a very simple jQuery (www.jquery.com) AJAX Upload script (based on jQuery: http://valums.com/ajax-upload/ ) and nyroModal for the loading-box (definately not necessary to use such a complex script for that, but I use it for other parts so it was the easiest way for me, you can find it on: http://nyromodal.nyrodev.com/ ) and made a simple function for quickly uploading and inserting images to the site. In my opinion, the whole broswer step is unnecessary to most users, so why bother?
How it works: I unhide the browse-button that's hidden as standard and located to the right of the url-input box. I then add the AJAXUpload-functionality, which makes the button clickable. When the button is clicked, a window opens with the users disk, so that he can locate the image he wants. Then, the AJAXUpload-script automatically makes an AJAX-request to upload the file (and you'll have to make that part yourself but you can find a very easy example on the AJAX Upload scripts homepage), which saves the file on the server and returns the address in the input-field.
If someone has the time to enhance the script to not use the jQuery for locating the input-box and instead using the proper CKEditor-function that would be great.
Anyway, I hope this can help some ppl on making this awesome editor making it a little bit more awesome for them and easy to use 
Enjoy!
CKEDITOR.on( 'dialogDefinition', function( ev ) {
// Take the dialog name and its definition from the event
// data.
var dialogName = ev.data.name;
var dialogDefinition = ev.data.definition;
// Check if the definition is from the dialog we're
// interested on (the "Link" dialog).
if ( dialogName == 'image' ) {
// Get a reference to the "Link Info" tab and the "Browse" button.
var infoTab = dialogDefinition.getContents( 'info' );
var browseButton = infoTab.get( 'browse' );
browseButton.hidden = false;
dialogDefinition.onLoad = function () {
new AjaxUpload( $(".cke_dialog_body .cke_dialog_page_contents:first .cke_dialog_ui_button:first") , {
action: 'actions.php?item=imageCKEditorUpload&action=upload',
onSubmit: function( file, extension ) {
//Loader
$.nyroModalManual({
zIndexStart: 10010,
minWidth: 100, // Minimum width
minHeight: 100, // Minimum height
closeButton: '',
showTransition: null,
content: '<div id="nyroModalLoader"></div>'
});
},
onComplete: function(file, response) {
//alert( response );
$(".cke_dialog_body .cke_dialog_page_contents:first input.cke_dialog_ui_input_text:first").val( jQuery.trim( response ) );
$.nyroModalRemove();
}
});
}
}
});