It works, but it's a bit cumbersome sometimes. Here's a thread from last year about this.
I think it's a bit easier now with the new forum software.
The problem is to get to the URL of the picture, as you can't right-click. It won't work if the picture you're trying to post is a link at the same time. For instance, I can't post the ADVrider banner on top, because it's a link to the home page at the same time.
What you need to do is tap and hold the image, then a menu will pop up. Select "Copy". Then click on "new reply" on ADV and tap on the "insert image" icon:
Another window will pop up, prompting you to insert the image URL. Delete the "http://" there. Then tap and hold there, the "paste" balloon will pop up. Paste the image URL, hit OK and the IMG code with the pic URL will show up in the reply window.
So it depends on the picture hoster you're using. Some of them offer iPhone apps, most of them will have an easy option to select and copy the image URL, some don't.