I have just tried this and it worked ok for me.
Click in the email where you want to insert the picture.
Click on "insert"
Click on "picture"
Browse to the picture you want.
If that still doesn't work check that you are set up to send e-mails in HTML.
Click on "tools"
Click on "options"
click on the "mail format" tab and chack that it is set for HTML and try again.