AOL Journals: Magic Smoke

Easy Way: In the entry creation window, click the blue hyperlink that says: "Add Pictures From Hometown":

Click the link, then choose the photo you want. If you use folders or subfolders to organize your pictures, you will have to dig down to the right subfolder until you find the photo you want (it will show you a preview of each photo):

Once you have it, click the "Add Picture" button.

This will stick the photo at the top of your entry, and depending on the size, will wrap the surrounding text around it. 

Slightly Harder Way (that gives you more control): Refer back to Step 4 above: After you upload the photo to File Manager, right-click the file name and copy the photo's address (depending on your browser, it will be either "Copy Shortcut" or "Copy Link Location"):

(Or, if you prefer, you can simply click the file name to view the picture; you can then copy the URL from the address bar.)

Then, when you're creating your entry, click the little camera button that's in the formatting toolbar:

This will pop up a box where you can put the address of the photo you want to use. You then paste the image URL you copied from File Manager into this box (to paste, either right-click the mouse and select "Paste", or using the keyboard shortcut of  Control-V):

This will insert the photo, and it will show up in the editing window. (This method also works for images that are hosted elsewhere, like if you're using third-party image hosting. Be careful, though, if you're hotlinking to someone else's photo -- you might want to save it to your own space first.) 

You can then continue editing the post, adding text above or below the photo: