Install All Necessary Graphics Filters
The Problem:
JPEG must be the most widely used picture format on the planet, given that almost every digital camera produces JPEGs of one sort or other. But Word won't let me put a single JPEG in my documents. It doesn't even seem to like GIFs. Every other word processor I've used can handle GIFs and JPEGs! Did I just get out of the wrong side of the bed this morning?
The Solution:
It sounds like the graphics filters you need aren't installed or are corrupted. Choose Start 
Control Panel Add or Remove Programs, click the Office item, and click the Change button. In the Office Setup Wizard, choose the Add or Remove Features option. In Office 2003, check the "Choose advanced customization of applications" box. Expand the Office Shared Features category and the Converters and Filters category underneath it. Click the Graphics Filters item and choose "Run all from My Computer" from the drop-down menu. (Alternatively, expand the Graphics Filters category and choose the individual graphics filters you need.)