Ok. I created a Picasa album for myself so I could learn.
Bring up the picture on the screen and look for "Link to This Photo" on the right of the screen:
Now, click on that, and some options open up below (compare the shot below with the one above).
Now, what you'll want to do is select your size first. Click on the arrow beside Thumbnail. I usually select medium. It fits nicely on KH that way.
Then, click in the box that says paste link in email or IM. Then, you can RIGHT-CLICK (click the right button on your mouse), and select copy.
Now, go to the KH site, into a new message, and click on the little box that Shandeh pointed out in her picture. When you have the window open, click the right mouse button again, and select PASTE. Then click Ok.
Wanna know something...I just tested my instructions, and they don't seem to work. They should, but they don't. Must be a glitch with Picasa.
Here's the easy way.
With you picture on the screen, right-click on the picture, and select copy. Come over to this window (KH), open a new message, and right-click, and select paste.
Hope this works.