It's working fine. You do have the same image in the link as you have in the img tag though, if you want a thumbnail you need to generate the thumbnail image and host that separately, then use the small image in the IMG tags (the image that actually gets displayed) and use the big image in the URL tags (the image that gets linked to).
Read through the instructions on photobucket, I'm sure they autogenerate the thumbnails for you.
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