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Originally Posted by itimpi
I have had no problems with embedded JPG files being handled by Calibre so if your pictures are not being converted then there is some other issue. Perhaps the embedded images are not standard JPG files?
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It's possible that they're standard image files, probably jpg, but something in the formatting isn't converting.
Word does images as both inline-with-text and in frames so the text can scroll around the images (and the frames have several options); it's possible that some of those formatting options don't translate to ePub, and the image gets lost in conversion. Or it may be in the ePub file, but have no way to be displayed, or the viewer may not have the ability to parse whatever HTML/CSS is created to locate the image.