For forwarding embedded pictures, you need to select Tools, Options,
Send, Mail HTML Settings, Send Pictures.

The CID: is the way embedded pictures are linked from the HTML code to
encoded attachment later in the message.  If the HTML link used http it
would be pointing to an image on a web site and not included in the
e-mail.

As for not being able to see the incoming images, the problem could be
either on the sender's end or recipient's end.

Problem at Sender's end:
- OLEXP: Image May Not Appear in Message Sent with Outlook Express (all
versions of OE)
http://support.microsoft.com/?kbid=171908
- OLEXP: Images in E-Mail Messages Are Missing After You Apply
Stationery
http://support.microsoft.com/?kbid=256974
- There was a bug in a update to OE6 awhile back where if an HTML
message uses the same image multiple time, only the first occurrence
will display.  This is a problem on the sender's end where OE generates
bad HTML links.
- OLEXP: Image May Not Appear in Message Received with Outlook Express
(very rare cause)
http://support.microsoft.com/?kbid=246186

Problem at Recipient's end:

- Red X instead of picture
http://www.fjsmjs.com/IE/redx.htm
- Images are blocked when you open an e-mail message in Outlook Express
SP2
http://support.microsoft.com/?kbid=843018
- If using XP SP2 and Tools, Options, Read, Read All Message In Plain
Text is selected, then attached images are not automatically displayed
at the bottom of the message.  For a quick workaround for the current
message, press ALT+Shift+H
- Image preview stops working
http://www.insideoe.com/problems/bugs.htm#nopreview
- Hotbar can cause image problems
http://www.thundercloud.net/help/hotbar-is-spyware.htm
- Another possible cause of problems is a corrupted cache.  Try clearing
it.
IE5+: Tools, Internet Options, General, Temporary Internet Files, Delete
Files
Temporary Internet Files Use More Disk Space Than Specified
http://support.microsoft.com/?kbid=301057

I had a similar situation until I "gave permission" to my OE6 to "ALLOW
ATT's" which IT deemed potentially threatening, and rely on my indwelling,
overriding Anti-Vir. to take care of it, if MSHotmail-Plus doesn't snag it
first.
KTM,
Saco,ME