I remember a long time ago we were all discussing picture/file hosting and I don't think anyone found a decent solution. I've been using dropbox for the last few weeks and it's very convenient. Here's a quick rundown:

• 2GB of free storage
• You can install the application (Windows/Mac/Linux) and just drag/drop files
• It doesn't alter your files at all. There's no compression or anything like you get with photobucket (or even flickr to a small extent).
• You have public and private storage. Anything in your Public folder is accessible for posting/sharing/whatever, login to dropbox website and click a file to get its public link. Click shorten link if you want it to do what bit.ly does.
• You can get additional free storage by referring other people (250mb per)

Here's my link for dropbox referrals: https://www.dropbox.com/referrals/NTg2OTY1MzU5
If anyone uses it to sign up, post your referral link and I'll put it here instead of mine so that we can spread the additional storage around.

Quick comparison of image quality between hosting on my website and hosting on dropbox. Should look indentical.