First bit of advice, if I hadn't made it clear in part 1, don't plan on doing it in one sitting. Hosting a blog carnival is definitely one of those things which should be done gradually. No, you don't have to add a link everytime you find one or get one mailed to you, but it does take me a good few hours, and I like to do it over a period of days. I once did a Chanukah HH with the concept of "eight days" as my theme.
If you've done your own searching for links, send them to yourself as emails, so you can file/save/store them, see part 1.
About illustrating with pictures, you can use the services of one of those free picture hosts like Photobucket and flickr. They give you the Html codes for various sizes, which you can copy into the draft on Word, see part 1.
Now, most important--
How to be a good "guest"
Just like any guest, you should provide a "gift." Now what's the most suitable gift to give a carnival host who has mentioned/linked your blog?
In one word-- recognition
Please write a short post mentioning the carnival and asking your readers to visit. Then you comment to the carnival itself. I usually add the link to my thankyou to make sure the host is aware of it.
PS Another super important thing. It's not enough to just have your post mentioned, right? You want other bloggers to visit your blog. So, you should visit the other blogs mentioned in the carival.
Big question: Is anyone else having trouble with blogger's spellcheck?