In Didger 3, the Image | Convert Image Projection command is only available in raster projects where the image has been calibrated with a projection, and no objects have yet been digitized on the image.
Make sure you have imported the image into a raster project. Go to Image | Calibrate Image and make sure that there is a projection specified in Step One. If there are any digitized objects on the image, delete them prior to using this command.
Updated March 20, 2014