Hmmmm, are you pressing 'p' to pick it up instead of the Enter button? If I remember correctly, you need to put the dead guy's arm in the grinder before you pick it up, then you can take it for your bone-crunching pleasure. If pressing 'p' doesn't work, contact tech support. Try installing some data files on your hard drive and reloading your save game...could be a CD issue.
Best of luck!
I can't seem to think up a good signature.