I just got and my software updated to a new version. I can add local image. 
Автор: David Beard
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I could create a image using local image just once. Then everytime after that It will only allow a "Image Online from Library..." . This happen even when I tried to change and existing published image too!
Thank You,
David Beard
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David, I have tried to recreate this issue and can not I'm sorry.
I added an image cell, put a local image in it, then went back and put a different local image in it without difficulty.
Have you restarted your PC recently? I have had similar issues (inability to edit text in a text cell) when Windows did a background update that I was not aware of.