I too found this problem on my parent's computer using live mail and gave up and went to another mail client.
However a google search found this workaround which appears to make sense but I have not verified it as I won't let live mail near my computer!
Howto
If it works please report back and next time I am fixing (and there's always a next time) my folks computer I will show them how.
I have also found this useful on my computer.
Image Resizer for Windows It allows me to easily shrink my 5meg+ photos to a respectable size for emailing. You just have to delete the smaller photo after you send it or save them all to a temp folder and clean it out regularly.