Yes, that's the same as the example I gave in yesterday's posting at 9.53pm. So what options do you have on that Insert menu?

Then again to keep it simple you could just click on the paperclip icon which will bring up the popup window called 'Insert Attachment' and browse to pics file...etc as above.

"using insert option all i get on the dropdown is file attachment with all the rest greyed out"

That's as it should be, have just tested it myself it works, do the following:

click on 'File Attachment' which will open a popup window called 'Insert Attachment' where you can browse/navigate to your picture file, select/highlight file(s), and then click on the 'Attach' button.

I no longer use XP nor OE, but remember that PC screens display as 72dpi. If you want a photo to show as a part of the text, use your photo software to make a copy of the photo at, say, 4"x6" at 72dpi. I usually keep photos at A4 and 300 dpi in case of printing, but make smaller copies for photo frames etc otherwise the same problem occurs of pixels being spread out to 72dpi.