Yeah, so then you have to attach them and there is a 1MB limit. I floated the suggestion of a group photo site so we could upload pics there and not use up our server space (with attachments), which is limited.
If you click the img button, bbcode pops up and you need to insert the pic url in between the brackets. It's a bit crude... one of the reasons I prefer ProBoards, they've cleaned up things like that so you see less bbcode. The image url needs to be from a website where you have uploaded the pic (like Flickr, picassa, photobucket, etc.).