Few days back, Microsoft has disabled the feature to add photos directly to mail body, the way we used to do. The feature was disabled due to some security flaw, that will be fixed and added soon by the end of September 2009.
“During a recent review, we identified an incompatibility with Internet Explorer that caused a security flaw with photo uploads, and we made the decision to temporarily remove the feature. The Hotmail team takes security very seriously and we expect to bring back the photo upload feature by the end of September. In the meantime, you can still add pictures as attachments to your Hotmail messages, by clicking Attach, and then File, and then selecting the picture you want to include.” Windows Live Team said.
So Windows Live team is constantly reviewing Hotmail to ensure quality of services and may fix it by the end of September.