Yes, the image has to be online somewhere (not on your computer), and you have to know the url to find it, such as http: //www.website.com/ospimages/image.jpg. Then when you click New Reply, choose the Add Image icon (the one next to the emoticons) and enter in the url.
Please be sure the image size is small enough as to not overwhelm our screens and require scrolling to see it!! Way too many posters here do not properly resize their images ... they are WAY too large. It doesn't have to be that big. The one Jayson posted is about as large as they should be.