Are you trying to import the picture under sketch so you can trace it? I ran into this the other day except my issue was while I was in the middle of making a part. I right clicked on my part and went to the appearance options > advanced > color/image tab?> appearance drop down > browse... I hope that helps out somewhat.
That's what I was attempting - to insert the picture in a sketch and Autotrace it. Then I also realized that Insert->Picture doesn't exist under the Insert menu.
Interesting, the only way that I have been able to get this to work is by extruding it. Once its extruded the image shows up. I never tried importing the picture first then tracting, I've always extruded then cut material away.
From a couple of "Solutions" listed in the Knowledge Base at the Customer Portal;
The 'Insert picture' command that was found under the 'Insert' pull down has been moved to the DisplayManager in SolidWorks 2011. For more information, please search for 'Scenes' in the SolidWorks 2011 Help File.
Generally, the Insert >Picture option is greyed out if the picture is already inserted in the background.
Sometimes this confusion is caused because of the inserted picture is not visible in the graphics area. This can happen in two cases:
1. If the ‘Picture’ option is unselected under SolidWorks View Menu (View >Display >Picture)
2. If "Use document scene background" is set under Tools >Options >System Options >Colors). Change this to Plain, Gradient, or Image file
Delete an already inserted picture from View >Modify >Picture >Delete. Once this picture is deleted, the Insert >picture option will be selectable (not greyed out).
Which completely flies in the face of the Help file at