In fact, you don't even need the FormattedTextEditor, control, you can just set the Style of the column to FormattedText. Here's some sample code I threw together. I have a grid bound to an UltraDataSource with a single column and I am populate the value of that single column with Xml strings that contain embedded image data, which I generated from the images in an ImageList component.

        private void ultraGrid1_InitializeLayout(object sender, Infragistics.Win.UltraWinGrid.InitializeLayoutEventArgs e)
        {
            UltraGridLayout layout = e.Layout;
            UltraGridBand band = layout.Bands[0];
            UltraGridColumn column0 = band.Columns[0];

            column0.Style = Infragistics.Win.UltraWinGrid.ColumnStyle.FormattedText;
        }

        private void Form1_Load(object sender, EventArgs e)
        {
            StringBuilder sb = new StringBuilder();
            string imageString = GetImageTag(this.imageList1.Images[0]);
            sb.Append(imageString);
            sb.Append("Title1");
            imageString = GetImageTag(this.imageList1.Images[1]);
            sb.Append(imageString);
            sb.Append("Title2");
            imageString = GetImageTag(this.imageList1.Images[2]);
            sb.Append(imageString);
            sb.Append("Title3");
            this.ultraDataSource1.Rows.Add(new object[] {sb.ToString()});
        }
        private static string GetImageTag(Image image)
        {
            return string.Format("<img style=\"width:{0}px; height:{1}px;\" data=\"{2}\"/>",
                image.Width,
                image.Height,
                Infragistics.Win.FormattedLinkLabel.FormattedLinkEditor.EncodeImage(image));
        }

Never mind I figured this out.  I was confused about the escape characters.  I copied the code which used C# and changed it to VB and kept the \ escape characters in.  Once I took these out this worked fine

So I tried using this code in my project but my formattedtext column is an unbound column.  I was using the code below to add the image into it in the InitializeRow event.  I fist set the cell value to the string but that did not work and just showed all the text unformatted in the cell.  Then I looked at your example and tried to use the string to create an object and then set the value ot that object but I get an error saying it must implement IConvertible.  What am I doing wrong? 

Private Sub grdResults_InitializeRow(sender As Object, e As InitializeRowEventArgs) Handles grdResults.InitializeRow

Dim strTypeDisplay As String

strTypeDisplay = "" 

If e.Row.Cells("ResultType").Value = CentralSearchResultType.Customer Then
     strTypeDisplay = strTypeDisplay + GetImageTag(CsiImageResources.CsiImageList.Images(38)) + " "
ElseIf e.Row.Cells("ResultType").Value = CentralSearchResultType.Vendor Then
     strTypeDisplay = strTypeDisplay + GetImageTag(CsiImageResources.CsiImageList.Images(39)) + " "
Else
     strTypeDisplay = strTypeDisplay + GetImageTag(CsiImageResources.CsiImageList.Images(40)) + " "
End If

If e.Row.Cells("Status").Value = "A" Then
     strTypeDisplay = strTypeDisplay + GetImageTag(CsiImageResources.CsiImageList.Images(41)) '+ ""

Else
      strTypeDisplay = strTypeDisplay + GetImageTag(CsiImageResources.CsiImageList.Images(42)) '+ ""
End If

Dim x As Object = New Object() {strTypeDisplay}

e.Row.Cells("DisplayMatchNumber").Value = x

End Sub

Private Function GetImageTag(image As Image) As String

Return String.Format("",
image.Width,
image.Height,
Infragistics.Win.FormattedLinkLabel.FormattedLinkEditor.EncodeImage(image))

End Function

In case this helps this is the contents of strTypeDisplay

"<img style=\"width:16px; height:16px;\" data=\"AAEAAAD/////AQAAAAAAAAAMAgAAAFFTeXN0ZW0uRHJhd2luZywgVmVyc2lvbj00LjAuMC4wLCBDdWx0dXJlPW5ldXRyYWwsIFB1YmxpY0tleVRva2VuPWIwM2Y1ZjdmMTFkNTBhM2EFAQAAABVTeXN0ZW0uRHJhd2luZy5CaXRtYXABAAAABERhdGEHAgIAAAAJAwAAAA8DAAAAggEAAAKJUE5HDQoaCgAAAA1JSERSAAAAEAAAABAIBgAAAB/z/2EAAAABc1JHQgCuzhzpAAAABGdBTUEAALGPC/xhBQAAAAlwSFlzAAAOwwAADsMBx2+oZAAAARdJREFUOE+VkjGyQDAYhN1JpVPpHMAFVEavU6mMXqVTUalULmAUOneQRqfy5ovEiHneGzuzkz+b32YlsY4bxnE8bNu+GIahWnmHYdA0jWHgeZ5aeYdhUJalYQCf2LZNVSc+G8zzrKoTnw3SNFXViU8GxEfb910pHw26rpPasixKeRg8byEIgmNdV/kBzLJM6nVdX5ph8HwHJEJjhLwLdEatXQbDMBxRFBkGJNAG1LwLdEbm0oCDoYnTvX+sSVwafd83dAw4E4t7ZdF1XaNBk90wyPPc0Pu+l7dive18p/4Nap2E3YF1b/yNjuPIRhKQJkkSmZY5+NeAfwXsrK+P1MyBFcdx9ReLoqiEELKepknWbdvKuRCi+gHCDb5S3s/sZwAAAABJRU5ErkJgggsAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA=\"/> "