The first step is to remove the old picture. Sometimes the picture refuses to get removed. Then the first remedy is to clear the cache. Always use Firefox browser for optimum logging experience.
If clearing the cache does not help login at Blogger.com and click 'Layout' link on Dashboard. On Page Elements subtab click 'Edit Html' subtab at top. In Template Code box scroll down to this code :
<b:section class='header' id='header' maxwidgets='1' showaddelement='no'>
<b:widget id='Header1' locked='true' title='My Blog (Header)' type='Header'
Change this to :
<b:section class='header' id='header' maxwidgets='3' showaddelement='yes'>
<b:widget id='Header1' locked='false' title='My Blog (Header)' type='Header'
Save Template. Switch to
Page Elements tab. Click
Edit link in the
Blog title widget. In popup window click
Remove button.
Then click 'Add Page Element' link in the header. In pop up window choose 'Page Header' widget and choose the options and save. Here in the options you can add a new image or you can add it as in the next step.