We're getting a lot of questions on this, so I thought I'd put a sticky thread up to answer all them all.
Here is how the photos (and other attachments) work. You have to be in the "advanced" reply mode (not Quick Reply) to include photos in your post. Start by clicking the paperclip icon/attach button in the toolbar at the top of the editor. It will give you the following Manage Attachments pop up window.
As you can see, it allows you to load up a file from your hard drive or from somewhere on the web if you can provide the URL. It also shows you what types of other attachments you can upload as well as the file size limits for all files and the dimension limits for photos.
After you choose your photos (or other attachments), click the upload button and they will appear in a list in the Manage Attachments window. When you're done uploading all your attachments, close the Manage Attachments window. Now when you click on the paperclip icon/attach button in the toolbar, you'll see a drop down list that includes all the attachments you uploaded.
There are two things you can do with these photos/attachments. You can place them inline with your message text or you can include them as "attachments" at the end of your message. If you'd like to place your photos/attachments within the text of your message, put your cursor where you want the photos/attachments to go, go back up and click on the paperclip icon/attach button in the toolbar and choose which photos/attachments you'd like to place in that spot. The system will place a little piece of code into your message to indicate where the image will be placed. That image is no longer an attachment and will not appear at the bottom of your message. It will appear wherever you placed it in your message.
Any photos/attachments that you uploaded but did not explicitly place within your text as described above, will show up at the end of your message in a box called "Attached Images." Just for your viewing pleasure, I've included a test attachment at the end of my message.