Is it happening for *.JPG or *.GIF also ?? If *.GIF is also not displayed, the check your browser settings.
In internet explorer, Click Tools > Internet options, and in the Advanced tab, scroll down to multimedia section. an check "Show Pictures" field.
Which is the default program to handle jpg and gif files in your system ?
Just in case, if you double click and can't open the jpg files altgether, then you need to re-install Internet explorer and also try to upgrade to Service pack 1.