There's really no difference between an inline image and a thumbnail, except that a thumbnail may be a smaller copy of the image.
Are you using the visual editor or the html editor? Sometimes the HTML editor can have trouble with the upload buttons.
You can either upload the image using FTP (I suggest creating a "/images/" folder at the root of your site) and enter the image code by hand:
<img alt="[Describe the Image Here]" src="[URL of image]" width="[How wide you want the image to appear (in px)]" />
Or you can go into your user profile, make sure that "disable the visual editor" is unchecked, and then make sure you click the "visual" tab on the top-right of the editor.
The HTML entry method will definitely work, but the visual editor may be easier. Once you get good with HTML, you'll probably prefer entering it yourself because you get a lot better control over the results.