a) You can't upload an image via the Image widget, but you certainly can upload images to your blog. As I said, you do that in Media > Add New. There's no point uploading images to file hosting sites when you have your own blog.
b) What I suggested doesn't mean the image will look good in IE and bad in the other browsers, it means it will look good in all browsers including the lousy one. Explanation:
Your image is 353 pixels high and 500 pixels wide. But the sidebar in Elegant Grunge is 220 pixels wide, and in Selecta it's 281, so the themes tell browsers to display a scaled down version of the image (scaled down means smaller but same proportions). Other browsers understand this, IE doesn't. So the solution is to use images whose width doesn't exceed the available width of the theme (that is, scale them down yourself before uploading them instead of letting the browser try to do that).
Here's your image scaled down to the right widths for the two themes you're using:
Copy them to your computer, upload each one to the right blog via Media > Add New, copy the file URL you'll get, use that URL in the Image widget.