Photos seem to be uploading ok. Try reading the Blog Help file from this link or from under the Links section on the RH side of this blog. Sometimes Blogger gets busy, or hasn't had coffee yet. If you try again later it usually works.
Once you get the photo icon, in the Posting work area to open, you can Upload photos one at a time to Blogger and your posting using the Browse button. If the photo, that you have rights to, is elsewhere on the web, you can use the URL option.
The image in your posting (with the dreaded red X) links to what looks like a local file on your PC. After upload to Blogger, it should look something like:
http://2.bp.blogspot.com/_ixUwuTfREso/RpkhFd1NHFI/AAAAAAAAAK8/-kZwn-suX7s/s320/Piper+004.jpg when you Right Click it and select Properites.
Or if you have a Flickr or Picasa Web Album, you can embed photo images that way by pasting in the HTML code provided on those web sites (Use the Edit HTML tab in the Blogger Posting area). Like this: