As you recognize, producing a report – as an rtf – and then editing-in any further images is not only hugely resource intensive but crucially destroys the validity of any report indexes and also means that you cannot save the revised report for incorporating into ‘Publisher’.
Report indexes can be regenerated for an RTF file produced by RM and then edited manually. I do so on a regular basis. The indexes have to be regenerated from within Microsoft Word or other word processing program. Microsoft Word seems to be the word processing program that is most successful in processing RTF files produced by RM.
With respect to Publisher, I have never used it - only played with it. On it's face it appears to be an absolutely wonderful feature. But every time I become inspired to play with it again, I discover anew that it seems extremely limited in what it can do. The biggest limitation is the one you cite - that only RM can put things into a Publisher document and I can't put documents of my own into Publisher. In particular, I can't produce an RTF file with RM, edit the RTF file with Microsoft Word, and then include the edited RTF file in publisher. I may be missing a way to do so. If so, it would be most appreciated if someone could point out how to do it.
On the larger question of including photos in narrative reports produced by RM, my first experience with this problem was with Family Origins which was RM's predecessor. I linked a tombstone photo to a burial fact and naively expected the photo to show up in a narrative report. But of course the photo didn't show up, and such support has not been added in RM1, RM2, RM3, RM4, RM5, or RM6.
The bad experience with the tombstone photo and Family Origins clouded my opinion about this issue so badly, that I concluded that for me personally (and other users are not so negative about it as me), there was no value in linking photos into RM at all. RM can print photos via the scrapbook mechanism, but I can do the same thing better and more easily from outside of RM. For example, I can just embed the photos into a Microsoft Word document. Nevertheless, I'm a heavy user of media inside RM. It's just that all the media I link into RM are documents of various sorts, and I link the documents to sources rather than to people or to events or to places or any such.