Ask Bill! Yes it happens like that - Defies logic. I tend to make a copy of the picture and open it in a Photo Manipulation program such as PhotoExpress or Photo Impact, then save it as a JPEG invoking the options to compress it - File>Save As. ( I rename the file with the original name but add LowRes to the file name.
Even if you pasted two of your files on an A4 Page you could compress the individual file sizes by at least 50% and not notice any difference if the document is printed. If the document is only going to be viewed on screen or the photos are going to be about 3 x 2" you can be more ruthless and compress them down to about 25% of the original size.
As a further suggestion, once you`ve created the Word Document convert it to a PDF file. click here and download the free program. It installs PrimoPDF as a printer and will compress the Word Document quite drastically without noticeable loss of resolution. It will also make it e-mailable.