diff --git a/editor/ui/dialogs/content/EdImageOverlay.js b/editor/ui/dialogs/content/EdImageOverlay.js
index 7487d1c43a..30e32ae9cf 100644
--- a/editor/ui/dialogs/content/EdImageOverlay.js
+++ b/editor/ui/dialogs/content/EdImageOverlay.js
@@ -119,33 +119,20 @@ function InitImage()
   // Force loading of image from its source and show preview image
   LoadPreviewImage();
 
-  if (globalElement.hasAttribute("title"))
-    gDialog.titleInput.value = globalElement.getAttribute("title");
+  gDialog.titleInput.value = globalElement.getAttribute("title");
 
   var hasAltText = globalElement.hasAttribute("alt");
-  var altText;
-  if (hasAltText)
+  var altText = globalElement.getAttribute("alt");
+  gDialog.altTextInput.value = altText;
+  if (altText || (!hasAltText && globalElement.hasAttribute("src")))
   {
-    altText = globalElement.getAttribute("alt");
-    gDialog.altTextInput.value = altText;
+    gDialog.altTextRadioGroup.selectedItem = gDialog.altTextRadio;
   }
-
-  // Initialize altText widgets during dialog startup 
-  //   or if user enterred altText in Advanced Edit dialog
-  //  (this preserves "Don't use alt text" radio button state)
-  if (!gDialog.altTextRadioGroup.selectedItem || altText)
+  else if (hasAltText)
   {
-    if (gInsertNewImage || !hasAltText || (hasAltText && gDialog.altTextInput.value))
-    {
-      SetAltTextDisabled(false);
-      gDialog.altTextRadioGroup.selectedItem = gDialog.altTextRadio;
-    }
-    else
-    {
-      SetAltTextDisabled(true);
-      gDialog.altTextRadioGroup.selectedItem = gDialog.noAltTextRadio;
-    }
+    gDialog.altTextRadioGroup.selectedItem = gDialog.noAltTextRadio;
   }
+  SetAltTextDisabled(gDialog.altTextRadioGroup.selectedItem == gDialog.noAltTextRadio);
 
   // setup the height and width widgets
   var width = InitPixelOrPercentMenulist(globalElement,
@@ -562,14 +549,21 @@ function ValidateImage()
   if (useAlt)
     alt = TrimString(gDialog.altTextInput.value);
 
-  if (gDoAltTextError && useAlt && !alt)
+  if (alt || !useAlt)
+  {
+    globalElement.setAttribute("alt", alt);
+  }
+  else if (!gDoAltTextError)
+  {
+    globalElement.removeAttribute("alt");
+  }
+  else
   {
     AlertWithTitle(null, GetString("NoAltText"));
     SwitchToValidatePanel();
     gDialog.altTextInput.focus();
     return false;
   }
-  globalElement.setAttribute("alt", alt);
 
   var width = "";
   var height = "";
diff --git a/mail/test/mozmill/composition/test-dialogs.js b/mail/test/mozmill/composition/test-dialogs.js
new file mode 100644
index 0000000000..b3571c11b9
--- /dev/null
+++ b/mail/test/mozmill/composition/test-dialogs.js
@@ -0,0 +1,154 @@
+/* ***** BEGIN LICENSE BLOCK *****
+ * Version: MPL 1.1/GPL 2.0/LGPL 2.1
+ *
+ * The contents of this file are subject to the Mozilla Public License Version
+ * 1.1 (the "License"); you may not use this file except in compliance with
+ * the License. You may obtain a copy of the License at
+ * http://www.mozilla.org/MPL/
+ *
+ * Software distributed under the License is distributed on an "AS IS" basis,
+ * WITHOUT WARRANTY OF ANY KIND, either express or implied. See the License
+ * for the specific language governing rights and limitations under the
+ * License.
+ *
+ * The Original Code is mozilla.org code.
+ *
+ * The Initial Developer of the Original Code is
+ *    The Mozilla Foundation
+ * Portions created by the Initial Developer are Copyright (C) 2011
+ * the Initial Developer. All Rights Reserved.
+ *
+ * Contributor(s):
+ *   Jonathan Protzenko <jonathan.protzenko@gmail.com>
+ *
+ * Alternatively, the contents of this file may be used under the terms of
+ * either the GNU General Public License Version 2 or later (the "GPL"), or
+ * the GNU Lesser General Public License Version 2.1 or later (the "LGPL"),
+ * in which case the provisions of the GPL or the LGPL are applicable instead
+ * of those above. If you wish to allow use of your version of this file only
+ * under the terms of either the GPL or the LGPL, and not to allow others to
+ * use your version of this file under the terms of the MPL, indicate your
+ * decision by deleting the provisions above and replace them with the notice
+ * and other provisions required by the GPL or the LGPL. If you do not delete
+ * the provisions above, a recipient may use your version of this file under
+ * the terms of any one of the MPL, the GPL or the LGPL.
+ *
+ * ***** END LICENSE BLOCK ***** */
+
+var Ci = Components.interfaces;
+var Cc = Components.classes;
+var Cu = Components.utils;
+
+var elib = {};
+Cu.import('resource://mozmill/modules/elementslib.js', elib);
+
+var MODULE_NAME = 'test-dialogs';
+
+var RELATIVE_ROOT = '../shared-modules';
+var MODULE_REQUIRES = ['folder-display-helpers', 'compose-helpers',
+                       'window-helpers', 'keyboard-helpers'];
+
+var fdh, ch, wh, kh;
+
+function setupModule(module) {
+  fdh = collector.getModule('folder-display-helpers');
+  fdh.installInto(module);
+  ch = collector.getModule("compose-helpers");
+  ch.installInto(module);
+  wh = collector.getModule('window-helpers');
+  wh.installInto(module);
+  kh = collector.getModule('keyboard-helpers');
+  kh.installInto(module);
+}
+
+
+function test_image_insertion_dialog_persist() {
+  let cwc = open_compose_new_mail();
+
+  // First focus on the editor element
+  cwc.e("content-frame").focus();
+
+  // Now open the image window
+  wh.plan_for_modal_dialog("imageDlg", function insert_image(mwc) {
+    // Insert the url of the image.
+    let srcloc = mwc.window.document.getElementById("srcInput");
+    srcloc.focus();
+
+    input_value(mwc, "whateverItDoesntMatterAnyway.png");
+    mwc.sleep(0);
+
+    // Don't add alternate text
+    mwc.click(mwc.eid("noAltTextRadio"));
+
+    mwc.window.document.documentElement.acceptDialog();
+  });
+  cwc.click(cwc.eid("insertImage"));
+  wh.wait_for_modal_dialog();
+  wait_for_window_close();
+
+  // Check that the radio option persists
+  wh.plan_for_modal_dialog("imageDlg", function insert_image(mwc) {
+    assert_true(mwc.window.document.getElementById("noAltTextRadio").selected,
+      "We should persist the previously selected value");
+    // We change to "use alt text"
+    mwc.click(mwc.eid("altTextRadio"));
+    mwc.window.document.documentElement.cancelDialog();
+  });
+  cwc.click(cwc.eid("insertImage"));
+  wh.wait_for_modal_dialog();
+  wait_for_window_close();
+
+  // Check that the radio option still persists (be really sure)
+  wh.plan_for_modal_dialog("imageDlg", function insert_image(mwc) {
+    assert_true(mwc.window.document.getElementById("altTextRadio").selected,
+      "We should persist the previously selected value");
+    // Accept the dialog
+    mwc.window.document.documentElement.cancelDialog();
+  });
+  cwc.click(cwc.eid("insertImage"));
+  wh.wait_for_modal_dialog();
+  wait_for_window_close();
+
+  // Get the inserted image, double-click it, make sure we switch to "no alt
+  // text", despite the persisted value being "use alt text"
+  let img = cwc.e("content-frame").contentDocument.getElementsByTagName("img")[0];
+  wh.plan_for_modal_dialog("imageDlg", function insert_image(mwc) {
+    assert_true(mwc.window.document.getElementById("noAltTextRadio").selected,
+      "We shouldn't use the persisted value because the insert image has no alt text");
+    mwc.window.document.documentElement.cancelDialog();
+  });
+  cwc.doubleClick(new elib.Elem(img));
+  wh.wait_for_modal_dialog();
+  wait_for_window_close();
+
+  // Now use some alt text for the edit image dialog
+  wh.plan_for_modal_dialog("imageDlg", function insert_image(mwc) {
+    assert_true(mwc.window.document.getElementById("noAltTextRadio").selected,
+      "That value should persist still...");
+    mwc.click(mwc.eid("altTextRadio"));
+
+    let srcloc = mwc.window.document.getElementById("altTextInput");
+    srcloc.focus();
+    input_value(mwc, "some alt text");
+    mwc.sleep(0);
+    // Accept the dialog
+    mwc.window.document.documentElement.acceptDialog();
+  });
+  cwc.doubleClick(new elib.Elem(img));
+  wh.wait_for_modal_dialog();
+  wait_for_window_close();
+
+  // Make sure next time we edit it, we still have "use alt text" selected.
+  let img = cwc.e("content-frame").contentDocument.getElementsByTagName("img")[0];
+  wh.plan_for_modal_dialog("imageDlg", function insert_image(mwc) {
+    assert_true(mwc.window.document.getElementById("altTextRadio").selected,
+      "We edited the image to make it have alt text, we should keep it selected");
+    // Accept the dialog
+    mwc.window.document.documentElement.cancelDialog();
+  });
+  cwc.doubleClick(new elib.Elem(img));
+  wh.wait_for_modal_dialog();
+  wait_for_window_close();
+
+  close_compose_window(cwc);
+}