Oh, sorry, I didn't realise what you were getting at.
Either way is possible, be it inserting a picture, or referencing an image field in the database. For instance, images stored in Oracle databases are saved as BLOB fields, and BLOBs can be referenced in Crystal just like a regular old field.
If you have access to the Crystal report samples, I believe there's a report called "Employee Profile" which demos this functionality.
Naith