You want to attach a picture, so in your mail to click on the paperclip and browse to My Pictures. What happens next?
Now go into My Computer, browse to your My Pictures folder and look what's inside. What do you see?
I have XP and use IE as my browser. All my photos are saved in Picasa 3. Whenever I want one as an attachment for email, I click on My Pictures and choose from there. I accidentally must have clicked something when downloading from my camera which has caused this function to disappear. So far, nothing I have tried has brought it back with the exception of a few folders of older pictures. All my pictures in Picasa have remained intact.