I only just figured out how a couple months ago.
First you need to have the picture hosted somewhere like PhotoBucket.
Under your pic in Photobucket will be a few options for how to link to it.
Copy the URL under the pic.
Come back to TE, and click on the little mountain-and-sun square in the tool bar at the top of your post screen.
It will prompt you for the URL. Copy the URL into the blank.
The picture should show up then as a picture, rather than as a URL link.
Good Luck!
"If Americans want to live the American Dream, they should go to Denmark." - Richard Wilkinson