It’s worth noting, the document conversion service doesn’t convert embedded images – which is a pain (and why? They’re available as image files inside the .docx file! Come on Microsoft, that’s craaaazy!)
Instead, you have to insert them as linked objects :
Objects such as images that you add to your Word 2007 document will not appear on the converted Web page if they are embedded in the document. To add these objects so that they appear on the converted Web page, first upload these objects to a document library and then insert them as linked objects (from this location) rather than embedded objects in your document.
There are some instructions here, but this is my guide:
First, find your image on your web page. In SharePoint, this might be a Picture Gallery. Copy the image by Right Click > Copy
Go to Word, and Paste > Paste Special…
Select that you want HTML Format :
And congratulations, you’ve inserted a link to the image on the web server, rather than the image itself:
Andy Burns' Blog 
[…] to a publishing Page. There are some limitations to this, such as what happens to metadata, and what happens to embedded content. This last one is particularly relevant as many Word documents do contain images as diagrams, etc.. […]
[…] I’ve mentioned how the Document Conversion Service doesn’t extract images and about how you have to insert them as linked objects. Well, it turns out that there are easier ways to link objects in than I’d […]
Hi Andy,
You are great man.
Your articles are good and helpful.
My requirement is to convert a document library document into webpage [html][/html] and display that into CEWP.Is this possible.I am thinking to use smart client authing but I need this process automated.I mean when a document uploaded to a document lib by a workflow it should get converted into webpage and then displayed to CEWP or custom user control if possible
Thanks in Advance.
That’s not going to work – the content editor web part bit.
Otherwise, converting Documents into web pages – that’s what the Document Conversion Service does. I’d try Googling for a tutorial on how to set that up (there’s a fair bit to it).