This has nothing to do with microsoft.
I just tested 3 emails, one from my corporate (office 365), one from gmail, and one from icloud.
I sent the 3 emails to both my office 365 and my gmail accounts.
I sent a single photo, original size.
All 6 of the photos came in as in-line photos instead of attachments.
This is clearly an apple thing. They think it's prettier to have in-line photos instead of attachments, so that's what they do. and while I agree that it is a pretty feature, it's also very annoying if that's not what you want. Basically emailing photos from an iPhone in order to share the photo files is useless. You need to use iCloud sharing, or Dropbox, or photostream or something like that. But if you want to add a photo to an email with a (See photo below:) or with a caption etc. this works great.
(Just for fun, I also used the Outlook app, and they have decided on the same method of image embedding. So no, it's not just apple)