Handle bar height and reach.
 

I'm not sure what exactly is the proper way to set handle bar height and reach but I'm just going by what is most comfortable. This is my bike now...

http://img387.imageshack.us/img387/6...2221resize.jpg

From a seated position I find that I'm a little too low when my hands are near the stem and at the same time I'm reaching to far forward. Judging by the picture, should my stem come up a bit?

As far as reach goes... smaller stem?

push your saddle forward lol

Saddle adjustments are for placing your body over the bottom bracket and pedals, not for fixing reach issues.

Get a shorter stem.

The setup now looks reasonable but this is the Internet not the LBS therefore **********?
Note that moving the saddle forward will bring you closer to the bars but also move you to a different position above the bottom bracket.
...yeah you can raise the stem.
...get a shorter one if that helps.

snowman beat me to the BB remark

Why don't you try raising your stem up to the minimum insertion mark? That'll raise the handlebar and move it closer to the saddle. Ride it that way for awhile. If you decide you don't like it you'll have a better idea of what you have to do and you won't have wasted any money.

I don't know about other manufacturers, but with the Nitto Technomic stems, a 4cm change in height (up) moves the handlebars back 1.5cm

WRT "minimum insertion": On the Nitto stems, it's 65mm, giving you 135mm on the Technomic "Deluxe", and 185mm on the Technomic "Standard" (the "Deluxe" is shiny, but not lengthy). The Nitto DirtDrop comes with extensions of 80mm and 100mm (same minimum insertion), but rather than looking like the number "7", it angles up-and-forward, steeply, giving added handlebar height without increasing the reach.

I just bought a Nitto DirtDrop (100mm) from Rivendell, and will be installing it as soon as I get some longer brake cables and housing (my LBS didn't leave me any slack on the lines, and tightened the brake lever assemblies so much, so...)

JBHOREN-

the lateral change has more to do w/ head tube angle than the stem. Most all stems are straight, the only reason the bars are moved back when you raise it up higher is b/c the headtube is slanted backwards.

Never discount the effects of age and alcohol...

Rivendell's figures were (IIRC) for a 72° headtube angle.