Images can be directly linked, or uploaded from files on your computer. They will be automatically re-sized if too wide for the main blog page. However, clicking on the photo should open up a larger version. Blogger will resample/resize uploaded images to take less space on the server (but 300 megs is the blog limit). See article: http://help.blogger.com/bin/answer.py?answer=42475
This 2007 Hooters Calendar is and example of a medium sized thumb.
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Click to enlarge (150KB full size).
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