Insert image into a post or page

Have an image prepped on your computer
1. Approximate resolution for photos should be 800-1000 pixels wide unless otherwise indicated; the minimum width for photos should be 300px, but images may be smaller if you only plan to display them small.
2. Photos should be prepared as .jpg; Other graphics may be .png or .gif.
In WordPress Admin, bring up the post or page where you wish to insert the image
Place the cursor at the beginning of the paragraph where you wish to insert the image
Just above the Toolbar and Editing box, click on the Add Media button
The Media window pops up over the editing window. If you are inserting an image you have used on the website before, click the Media Library tab and search for it; For a new image, drag the file from your desktop to where it says Drop files anywhere.
Enter a title for this image and Alternative Text (you may copy the title, or enter a short description of the image)
Caption and Description are optional, and most often not used.
The Link URL field should default to the Media File. If it's blank, click File URL, unless you know you want the image to link somewhere else
Select your preferred Alignment. In most cases select Left or Right, as this allows the text to be displayed beside the image, and wrap below the image.
For Size - WordPress can resize the image for you, and allow users to click on it to view the full size. Select Thumbnail for a small, cropped square image, or Medium for a medium-sized, un-cropped image.
Click Insert into Post. The Media popup should disappear, and the image should now be visible in the editing window. Do not be alarmed if the margins around the image are missing -- the correct margins will be applied to the actual page even if you don't see them in the editing window.
If you need to edit the image's settings -- such as if you want to resize it -- click on the image, and then click the Image icon that hovers over the image. You can select a percentage to reduce the size and change other settings.

Video Tutorial:

http://wordpress.tv/2009/01/05/embedding-photos-video-audio-into-your-posts