Yes, It might be a funny question, but still many bloggers do not know about where all my images stored? They are saved in Picasa Web Albums. While you prepare your post and upload an image, it is automatically saved in Picasa and links directly to your blogger posts.
Important Note: Do not delete or re-upload existing images on Picasa if they are linked on your Blog or Websites. Doing this will create a broken link on existing image on your Blog. It is advised to make separate albums for your new image uploads for further reference.