It's easy, just drag the photo from you computer desktop to the area under the text box by the paper clip icon. It says "Drag files here to attach, or choose files...

Or click on the ''... choose files..." link and you can browse the files on your computer disk, select it and automatically upload the image. 

Lastly, if you want to use an image stored on an external site like Photobucket, click on the "Insert other media" button and select "Insert image from URL".