Create Four Paws -- If you are using quick reply, just select the 'Insert Image' icon that is next to the little filmstrip. When that small box comes up, make sure the tab is on From Computer and not URL.
Browse for your picture. I try to make sure mine is on the desktop, so it is easier to find.
Select Upload Image and it should be there for you! But yes, you do need to make sure it is JPG or GIF and not PNG. Plus that it is a smaller size.
When I size them, I usually halve the pixels to 50 percent. But that is a more advanced type of doing things.