Hi Pete,
Thanks for trying to help.  My camera is a pretty standard Canon compact.  As I never print my piccy's (only attach them to emails or post them on web sites etc) the first thing I always do is reduce their size to 20% of the original in Paintshop Pro.  The one I was trying to post is much smaller than the one you've included below.  Mine is only 72dpi and measures 305 x 247 pixels (24 bit colour same as yours).  I'll describe exactly what happens.
I click on the "Browse" button to the right of the "Attach" field, browse to my picture and select it.  The local path appears in the Attach box.  I then hit "preview".  Windows (Vista) brings up a box asking me if I want to allow this web page to have access to my clipboard.  Doesn't matter whether I answer yes or no, the web page refreshes and the file path has disappeared from the box.  I've also tried using the "Insert Image" button at the top which only gives me the html place holders and no dialog for browsing as I'd expect.  It looks as if I have a setting on my Windows that's causing problems.