1) Login to your blog admin
URL: http://you.com/wp/wp-admin/
Username: you
Password: <password>
2) Write a new post
3) Upload your image
In the Upload area below the main text entry section, click File: “Choose File”. Navigate to the file you want to upload, select it and hit “Choose”.
4) Give the image a title and description
5) Click Upload
If your file is large, you may need to wait a bit for this upload to complete.
6) Click on the image and select “Send to editor”
This is the only tricky part that most people get wrong. The file is on the server but not linked to any post. You have to send it to the post so it shows up.
A few notes
The image will show up exactly where your cursor is in the post. Do all image processing (including sizing them correctly!) before you upload your pix. In the “Upload” area you will see a Browse All tab that you can use to delete old, unwanted images.