From trial and error it seems that using the blogger upload image tool works best with regard to adding any images.
Once this third screen pops you just have to find where you have saved your images. My documents, my pictures, desktop etc. You can also use images saved online by inserting the URL in the right hand side box.
The second image will pop up again with a file in the top left box. Now just click upload image and bobs your uncle....a picture with your post. Hope this is some help.