The New Post toolbar includes a button that inserts an image into the post. There are a number of ways to prepare and retrieve an image. You can adjust and resize the image in a standalone image editor like Photoshop or Gimp. You can upload a photo from your computer or other device, or you can point to an image that's already on the web.
Since Blogger is integrated with Picasa, you can actually handle all your images through your Picasa account. The Insert Image dialog lets you pull an image to the blog directly from one of your Picasa folders. Conversely, if you upload an image from your computer to your blog, it will be automatically placed in a Picasa folder. Picasa also has its own built-in image editing function, which will let you crop, resize and do other edits to an image before you post it to Blogger. Note that if you edit an image with Picasa after it's been posted to your blog, the old version of the image on the blog will not show the edits. You'd have to manually remove the old version and insert the edited version.
Once you've inserted the image into your Blogger post, there are a few options available that let you control the alignment of the image. It can be centered or placed on either side (with text alongside it), and you can adjust the size.
Looking to create a more unique look for your blog? Take a peek at the next section.