As Cory said, there is currently a Javascript thingie that resizes the display width of inline images to 400px as long as your browser supports it and you're using the default theme. However, your browser still needs to load the whole image before this can work, so if you go posting a whole pile of 2MiB JPEGs in a post it's going to take a while to load and generally piss people off. Unfortunately there's no better way to resize offsite images without slowing down the forum a lot, so if you can post smaller images then please do. As Cory mentioned, most of the photo hosting sites offer thumbnail support, so use that if you can or resize them yourself.
The inline attachment ability has the provision for making thumbnails automagically – however the last thing I want is for all my server's disk space to be used up by people posting hundreds of large JPEGs of their cat/dog/mother/etc, so it's currently disabled.
