If the picture is on your computer, simply press the "Browse" button at the bottom of the area where you type your post. A window will pop up and you can browse to the picture on your computer. Double click the file and that will automatically fill out the box next to the browse button. Click submit and everything should be all set. You cannot use the IMG tags for pictures that are on your computer, and you cannot use the browse button for pictures that are on the internet.
This is according to Paul's help thread.