Took me a while to work out, it appears Hotmail sucks monkey balls.
It seems Hotmail doesn't (like most others) allow easy inline images v attachments without coding it yourself.
So:
1) Make sure you upload your image to the web. If you have a website that allows hotlinking (aka remote hosting) use that. If not and your pic is also somewhere on the web, right click properties on the image and copy the weblink (url). (Incidentally, if your image is already on the web you can highlight it and copy with the mouse and just paste into a rich text mode message in Hotmail).
Assuming it is only on your PC drive (like a pic of your dog or something), upload it to the web so you can link to it in your email. Photobucket.com is a free image hosting service and easy to use. Assuming you haven't used that before, get an account on photobucket.com and upload your pic/s to it.
2) This is where Hotmail's suckiness comes into itself. Compose new mail. I'll assume you're in Rich text mode for that (that's the one where you have font buttons and smiley insertions etc. So, go to the Tools menu (just along from send) and choose Rich-Text Editor OFF (yes off). In you go to plaintext mode.
Insert the HTML code pointing to the pic of Fido or whatever on the web. E.g:
<img src="http://img15.photobucket.com/albums/v99/smiley/nameofsmileyspic.jpg"/>
[ Obviously, modify the bit in between " " to point to your image (if using Photobucket say, it gives the url so just copy and paste in the http part to the code above to insert in the mail. ]
Then, finally, go back to that Tools menu and choose Rich-Text Editor ON. There'll be the rich text compose message mode complete with said picture as a picture. Type whatever else you want into the email. Continue as normal.
3) That's it. Should work. Now i need to go catch a train back home.
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