>Hopefully someone will correct me if I'm wrong, but I believe
>that in order to embed a photo within the text of an email, the
>photo must be somewhere online already so that the HTML
>contained in the photo record can refer to it and grab the
It depends on the email software used to send the message.
Image content for an HTML formatted email may be in an externally hosted file, as you describe (sometimes referred to as a "remote" image), or the content may be in an attachment to the email message itself (sometimes referred to as an "embedded" image.
Usually an email client (or webmail system) will have a privacy setting to prevent "remote" images from being displayed automatically in your Inbox. That's because the access to the remote server can be tracked to determine if and when you read the message.
Embedded images are usually displayed automatically because they are safer in this regard. They were delivered to your computer as an attachment so there is no remote access; nothing to be tracked.
No surprise then that most commercial mass-mailings (legit as well as spam) use remote images, whereas most personal email software creates an embedded image when you drag and drop a picture into a message you are composing.
I can't speak to Y-mail though, I don't use it (much). Used through Yahoo's webmail interface (rather than POP from email software on your computer) it would be perfectly feasible for Yahoo to generate either a remote or embedded image, regardless of the image source.