I have tried inserting the pic in the mail through WLM. I have dragged and dropped it into the email. I have tried to set it as a file attachment rather than being displayed, and I have even tried using a direct link to the pic on my hard drive ... All failed.
This sounds suspect. The problem that this thread is concerned with is that of forwarding messages that contain embedded images. There is no general problem with sending images.
As always, the error message will give clues to what's wrong. If you don't remove an unsent message from the outbox, it can cause a logjam so that subsequent messages won't be sent, either. Please check that the outbox is empty before sending a new test message with an attached image to yourself, then examine any error message that appears.