I just tried the two methods that appear when I choose to reply to your message:
First, I went to the "Choose" box (below to the right of the message text box), clicked "choose", selected a jpeg from my PC, and clicked "Upload". I then clicked the pull-down menu by "Manage Current Attachments", and clicked on the image name (which was displayed). That attachment then showed up in my message, here:
[attachment=9439:Chaco1.jpg]
Second, I tried the other method: From the little icons above the message box, I clicked on one that is identified as "Insert Image", and inserted the URL of an image that is already on my website. Here is what I get.
Now I will just click on "Preview Post" to see what these look like.
By golly, it seems to work (the large black bars on the left and right of the second image are part of the jpeg; required by the program I used to build my website to prevent it from cropping my image).
I hope this helps.
Eric