It appears as thought either the previous implementation of inline image copy/paste was working because of a bug or the update introduced a new bug. So what is the issue? (SEE BOTTOM FOR UPDATE)
Updating my workstation with the March 2014 patch (http://support.microsoft.com/kb/2863908) my client shows this version now:
When a user attempts to copy/paste a picture inline to the IM window you get this message:
Prior to this patch, the copy/paste of images to the inline conversation window worked fine. In the organization we currently had peer-to-peer file transfer off for the customer network due to security concerns. Since the inline image is simply utilizing that feature, we decided to enabled peer-to-peer file transfer in the conferencing policy.
Once I enabled the policy and logged out and back into my client, I was able to inline image again.
So there you have it. If you update to the March 2013 and need to use inline images, make sure to enable peer-to-peer file transfers in your conference policy.
UPDATE: I have confirmed this was an intended change with part of SP1 due to some concerns around archiving and the fact that images were not stored in the archiving database.
UPDATE: To be clear, the client updates DOESN’T change your server policy. The issue is, if you had the peer-to-peer file transfer disabled previously this feature worked fine. Once you apply this patch, if you don’t enable peer-to-peer file transfer it no longer works.