Mister Word (author) from Californiaaah on May 23, 2014: The picture you just inserted will become something like this on a gray background: You're now ready to make the image into a variable image.Instead, press the little triangle on the right edge of that button to get a three-line menu, and click "Link to File." Do not format or resize the picture.
However, do not press the Insert button as usual after selecting the file.
Locate where you want to position your image, and insert an image from the image collection (any of them will do for now) onto the page in the usual manner using Insert + Picture + From File. Only if you're using Word 2003 or before, also make sure that the Mail Merge toolbar is visible in Word's menu bar if not: Tools + Customize, check off the Mail Merge box. If it's not already selected, select the data source (database) into the master document you'll be working with. Don't bother reporting the bug to Microsoft: they've known about it for a long time. If you're using Word 2007 or later, Save As the document in the Word 97 - 2003 (.doc) format - NOT the Word 2007 (.docx) format. For example, if you have a database which includes a "FirstName" field, you might name personnel photos "John.jpg," "Mary.jpg," and so forth. The key to variable images is to have a collection of photo or image files in a folder on your computer or network, and to name the images files the same as the contents of a field in the database. 
IncludePicture finicky and won't work if you so much as breathe on it the wrong way. Try to follow the instructions very, very precisely.
This step-by-step explanation has been excerpted from an online article on using IncludePicture and is included here by kind permission of its author.
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