Hi Lance,
pasting an image will appear to work, but you will get the too-long message unless it is a VERY tiny image. I think it gets MIME encoded which means converting it into a very long string of ASCII (keyboard) characters, effectively doubling the size, so images rapidly become too huge for a format meant for relatively short text messages.
Long text or multiple images can hit the limit to how long a post (or PM) can be. II guess it's about 1000 words but embedded images eat it up quite quickly.
You can put album images and linked images (as Jason says) into PMs, but I would limit it to 3 or 4 per message.
Neil