Ok, so it's either not converting at all, or showing the alt text. It's actually converted in the ubbthreads.inc.php file, in the do_markup function.
First thing I'd do is look at the source of the page. Look for where the :beathorse: text is at, and see if it actually has the <img src code for it so you can see what it's trying to load, or if it just says :beathorse: in the source of the page as well.
If it's the latter, then it's just not converting that markup at all. If it has the <img src portion then you can see what it's trying to load by looking at the <img src="/path/to/image/" portion.