YET ANOTHER BLOGGER CHANGE ...
When Blogger first came up with the new template designer in Beta testing, they called it Blogger In Draft... and it had a horrible and difficult to use photo uploader. Then this disappeared, and I thought that was the end of it. Now it's BACK... and it looks like it's set to stay. Boo hoo!
HOW DOES IT WORK?
Annoyingly! You CAN load an image from your computer - but some pictures take FOREVER! I wrote a post on my weight loss blog, so you can see how things work.
So my conclusion is: you need to resize your images to avoid a slow upload time. Which means more work for us, of course. The tutorial pix uploaded quickly and without any problems - the image I used on my post took FOREVER to upload, as it was a high resolution.
I also noticed that some images I posted DO NOT open into a larger size. So, although I've said don't mess around with the sizes, for some pix you may need to. I do hope this doesn't mean that Blogger won't keep the thumbnail option - it'll be a royal pain if they do! This will mean checking every photo loads at optimum size - and in the case of tutorials, as large as I can possibly make them.
I'd recommend you look at these tutorials I wrote previously re resizing images for the web, and also take a look at LiveWriter - you'll be able to bypass writing your posts in Blogger, and your pix will be exactly as you load them (one size, but at least you'll be able to add drop shadows and frame effects).