You directly copy the BB Code into the reply window. You should be careful of embedding photos that are large as it will embed with the original resolution, so images that are large will take up a large space.
To do this, you need to have a direct link to the image. You then place that image in between of a and [ /IMG] tag (without the space). An example is below:
[CODE]
Hello, I am embedding my image.
[IMG]http://link.to/my_image.jpg[ /IMG]
[/CODE]
EDIT: An example of this is the RadioReference banner. The link to this is [url]http://s.radioreference.com/i/p4/header-logo.gif[/url]. If I place that in the [IMG] tag, it produces the result below.
[IMG]http://s.radioreference.com/i/p4/header-logo.gif