You simply add the image to the first label. It's not part of the mailmerge process, as such; it's just a normal part of document creation. Then, when you have that label done, choose 'update labels'.

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Cheers,
Paul Edstein
[Fmr MS MVP - Word]

Ok I am half way there. What I have done with previous labels is record a macro so when I need some labels I just run the macro and it does it all for me. The problem I have is that when I select record the little cassette tape appears and it wont let me resize or move the image. How can I get round this?