The IMG button is only for *linking* to pictures that you already have on the web. It will ask you for the url to that picture.
to UPload a picture you will have to use the "Attach File" area. When you are composing a new thread or reply, two boxes below the area where you are typing your text you will see the Attach File block with a text entry box and a BROWSE button.
Click on BROWSE to locate the image you want to attach/upload and it will be attached to your note after you hit Submit Reply.
NOTE: Your image file (or any other file you wish to attach) *must* be less than 102400 bytes in size (about 102KB)