wow, nice! i had like to see your work. I have tried fabric painting but its really hard and requires a great amount of control over your hand. As for uploading the pic, I think you need to compress the files because they r exceeding the file size limit.
Fazeelat: you could upload the images on the web anywhere like photo bucket and then use the insert image icon and place the url of that image in the popup window. this will insert an image from any site.