It is not possible to insert a virus in a picture, since a virus needs to be executed. But it is possible to manipulate a picture in a way to exploit a flaw in microsofts gdiplus.dll library. This could do harm to a computer up to the extend which is similiar to that of a virus. But this is a very well known exploit and there are patches available.
You might need to update your windows. You can check at
http://www.securiteam.com/windowsntfocus/5QP0C1FE0Y.html whether you need to.
The other thing you might have heard of is W32/Perrun-A. This is more a pretty stupid study in which a malicious program is executed once the user clicks on a picture file on his computer. This is done by changing the registry so that the default application for displaying pictures is changed to the malicious program. This program cannot be installed through a picture. But it can be installed by clicking on an executable in an email attachement or similiar brainless actions. More info here:
http://www.sophos.com/virusinfo/analyses/w32perruna.html
http://www.sophos.com/pressoffice/news/articles/2002/06/va_perrun.html
palmer: i guess it was the exploit norton has found. I hope you updated your windows ...