To post pictures from your PC, you need to click on the attachment icon above (looks like a paperclip), and you'll get a popup box with upload options. Browse to the file on your comuter or URL (Web address), and hit upload and upon completion, close window. The images are thumbnailed, and can be clicked to make them bigger.

If the image is offsite, use the image tags
For a new avatar, you need to do that in the "UserCP". Click on "Edit Avatar", make sure "Use Custom Avatar" is checked, Browse to the image on your computer and upload. Done.

Image Limits:
  • Resolution: 800x600
  • Size : 512 KB

Resizing is enabled, however, for now, I am going to leave the restriction as is.