At least this is fixable with a work around.
The other issue I discovered, I can't seem to find a way around it that will allow me to upload images to Blogger in WLW, without a privacy/security risk involved, that sits in my blogs for the entire world to see.
That issue relates to giving out your GMail address/Blogger username to the whole world, as part of the image url. (this one is Google's fault)
When selecting the option to upload your images to Blogger, WLW uploads them to it's own album in PicasaWeb (in your account) and embeds the image with the URL given by Picasa. The issue is that your email address, which is also the username you use to log in to Blogger, is in the URL. (my username is different than the name used to sign my posts, for security/privacy reasons)
The only ways around this is not to upload the images to Blogger with WLW, and either configure WLW to upload them to your own FTP server and hotlink them or using Blogger's web based post editor to insert the images, so they will get a better URL that doesn't give away this kind of info.
Not everybody can use the FTP option, though, and even those that can upload the images to their own server may have hotlinking issues if their hosting company blocks that. Plus if the server goes down, you end up with a blog full of broken images. This happened to me and affected 10 blogs for over a week, while the hosting company sorted out it's issues.