The "insert image" is just there to write in the [img] tags, so it's possible to use a normal http picture link.
As far as I know, the uploading rules here is that you can also upload one picture (only
one, mind you) as an attachment, so that it will show up as a preview. The rest has to be from a 3rd part site.
If you upload your picture to
Photobucket or
Tinypic (or similar), then all you have to do is to copy the link with the [img] tags around, and paste it into the text where you want it.