I followed a few links from the Blogger site, and it lead me to the Blogger Help Group, where people have been plagued by this problem SINCE JULY.
The upshot: Blogger ain't gonna do nothing. But you can get your photo capability back by DUMPING INTERNET EXPLORER AND SWITCHING TO FIREFOX. I've been avoiding Firefox because I like Safari on the Mac and use IE at the office, but I finally bit the bullet and downloaded Firefox, and as you can see, I can get photos on the entries with no problem.
How could Microsoft let this happen? They've already lost the entire Mac market for browsers, now the same thing has happened for PCs? Guess they're too busy with Windows Vista to notice.