Well, I don't know if this is the be all and end all answer, but it works for me:
The key is that the picture has to be already posted on the web somewhere. If it's a picture from another site, that bit is done for you. If it's your own picture you'll need to join one of the many photo sharing websites and post it there first. There are a bunch of these and they are generally free - a couple of examples would be www.flickr.com and www.photobucket.com.
Once the picture is online, you'll need to copy its URL. The easiest way to do this is to right click on the picture in its original location and select Properties. Then copy the information next to the heading Address (URL). This part works for Internet Explorer - don't know about other browsers. Photobucket has a button below your photo that creates a copy of the URL automatically - keeps things nice and simple.
Then create your post as usual, and at the appropriate point click the Insert Image button (yellow mountain icon). Paste the URL copied above into the box that pops up. A couple of tips here would be: make sure you don't end up the http:// thing twice in the URL, and preview the post to make sure the picture is getting picked up correctly from its source.
Whew! I think I just made something easy sound complicated, but it really isn't. Good Luck!
Sounds good to me too micronut, also if I want a bigger size of photo to be posted from flickr.Go the photo you want to post, then go to the bigger size of that photo that will still fit the screen with out scrolling back and forth on flickr first before right clicking. The small size and the big size have to diffrent address. first one small size secound one medium size the large was too big
hope it helps Glen