I believe there are 2 ways:
1) for images on your hard drive, you can use the Upload embedded file option, using the browse button seen right above this text box ^^^ The files may have to be reduced in size, as the limit is only 100kb. This inserts the image in the body of the text, like this (trying it now):
2) for on-line images, you can use the Optional Link URL: option just below this text box, and you can provide a title below that.
I believe these options are only present if you're logged in properly.
Hope that helps,