There are two ways.
The first way, you need to upload your image to a website such as Shutterfly or Fotki or perhaps your ISP allows you to do so. After you've uploaded it, click on icon above this screen (when you're in edit mode) and choose the icon which says "Insert Image" (you can see it by hovering the cursor over it) and click. Then paste the link to the site that hosts the picture in between the tags. Doing it this way is better and it will look like this -
The other way, which is the easiest, is to click on "Attachments and other options" below this window when you're in edit mode. Then where it says "Attach:" click browse and find your photo. It will come out like this (you can then double-click it to enlarge it) :
