You are allowed to upload one (1) picture, under 50K in file size, to use in your auction listing. This photo is uploaded straight from your computer; you don't have to have it hosted online anywhere to use. This photo is converted to a thumbnail for the category listing pages and home page, and displayed full-size in your listing description.
When you get to the "upload photo" option on page three of the auction listing process, click the "browse" button. A browsing window will appear. From there, browse to the location of the photo on your computer, click on the photo, and click "open" or "ok." You'll see text appear in the "upload photo" box. Click the "Upload" button. The page will refresh, and your image will appear on the screen when it has been uploaded.
Alternatively, you can use a photo that you have hosted online somewhere (like your website) as your main auction photo. To do that, type or copy the URL into the box marked "or Enter File URL". Then, click the "upload" button. The page will refresh, and your image will appear on the screen when it has been uploaded.