If you simply insert a picture, it's embedded in the document and no links to the source file are maintained.
If you link to a file, Word can update the displayed image when the source file's content changes. However, if the source file can't be found (eg because you've emailed the file to someone), Word will display an empty box (probably of a different size) instead.
If you insert and link, Word can update the displayed image when the source file's content changes. However, if the source file can't be found, Word should display the last version of the image.
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Cheers,
Paul Edstein
[Fmr MS MVP - Word]
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