Hey, S0CSeven: I feel your pain. I, too, have bird-dogged MS about this very issue from the time I first discovered it, about the time they came out with the "new, improved!" WLM 2011.
The issue seems always to be between WLM and some other, non-Microsoft e-mail programs. Back and forth between WLM and Outlook, for example, no problem at all. But if I, using WLM, receive a message with embedded images from a friend using Thunderbird, when I then reply or forward the message, the images are stripped and attached as .jpg (or whatever) files.
I have explained and re-explained this to MS people time and time again, until I am blue in the face. Note, for example, they still want to know what error message is received when this happens. Well, guys, NO message is received, WLM just interprets and re-formats HTML improperly. If the WLM guys would just do whatever it is that Outlook does, we'd all be happy campers.