[SOLVED]


The issue was with Microsoft Paint itself, uninstalling and reinstalling it from the Windows OS with the Windows CD fixed the issue.


For some reason the Bitmap image, although rendered in a drag and drop, could not be inserted as an 'object' into MS Word, so the dynamic link assignment also failed. The aforementioned solution fixed this - I would not have thought that MS Word 2007 relied on MS Paint itself for some Bitmap background work, but it appears to function that way in this case.