Looks like you're limited to about 1MB in file size if you upload the pic from your computer.
Are you trying to link a pic from a website? If so, click the IMG button in the vB Code section. You can either manually type in the web addy or copy and paste it.
And uploading from your computer. Click the "Browse" button on the bottom of the screen below "Options" and look for the file on your computer. Then click the "Submit Reply" button.