Hi Keith,

In Word 2007 you are no longer able to group Autoshapes with Objects, and Pictures are objects.

Inserted Pictures, either individually or multi selected/groups are handled internally as
'Microsoft Office[2007] Graphic Objects' while
autoshapes are
 'MS Office[legacy] Drawing Objects'.'

The two types don't mix and they can't be grouped together.  You can create a Word 2003 'island' within a Word 2007 page by using
  Insert Tab=>Shape=>New Drawing Canvas
where the 'parts' have the same legacy properties (i.e. you can group or align or distribute evenly, Pictures and Shapes.

Word 2003 and 2007 have both 'known' that Inserted pictures are 'objects', the difference being is that in Word 2003, Word treats
them as 'pictures' when you select more than one, but in Word 2007 as soon as you shift click on two inserted pictures they are now
'one object' and don't play nice with their neighbors <g>.

For comparison:

In Word 2003:

A1. Insert=>Picture=>From File and choose a JPG.

A2. Right click, choose 'Format Picture and set
    Layout to 'in front of text'.

A3. Use Ctrl+C to copy the picture to the clipboard then use
    Edit=>Paste Special
   and note that the picture is listed as
     MS Office Drawing Object.

A4. Use Ctrl+V to paste a duplicate of the picture then drag them apart.

A5. Hold the shift key and click on each picture.

A6. Right click and you should see Format=>Picture

A7. Use Ctrl+C to copy the combined pictures to the clipboard

A8. Use Edit=>Paste Special
    and note that the combined item is the same type
    as in step #3.

A9. From the Drawing Toolbar, insert a rectangle Autoshape.

A10. With the shape selected use Ctrl+C to copy to the clipboard.

A11. Use Edit=>Paste Special
    and note that the shape is also seen by Word as a
     MS Office Drawing Object

A12. Shift Click the Shape and both pictures,
    right click and use Grouping=>Group.

In Word 2007 (Oil & Water)

B1. Insert Tab=>Picture and choose a JPG

B2. Right click, choose 'Text Wraping' and set
     to 'in front of text'. (note though that
     in the right click menu there is a
     'Format Picture' choice.

B3. Use Ctrl+C to copy the picture to the clipboard then use
       Home tab=>Paste=>Paste Special
    and note that the picture is listed as
       Microsoft Office Graphic Object.

B4. Use Ctrl+V to paste a duplicate of the picture then drag them apart.

B5. Hold the shift key and click on each picture.

B6. Right click and you note there is no longer a
    'Format Picture' choice, but 'Format Object'
    and that there is no 'Grouping' choice.

B7. Note that on the 'Picture Tools' tab that the
    'Grouping' tool is greyed out (as these are objects).
     You can resize, drag, etc the selected items but you can't
     'lock' them as a group.

B8. Insert Tab=>Shapes insert a rectangle Autoshape.

B9. With the shape selected use Ctrl+C to copy to the clipboard.

B10. Use Home Tab=>Paste=>Paste Special
    and note that the shape is also seen by Word as a
      MS Office Drawing Object (legacy item)

B11. Select the shape then hold the Shift key & try to group with the picture objects.  It doesn't work.

There are several workarounds.

One common one is to use
 Save As and save as Wd97-2003 file type to flip all of the graphics to Word 2003 behavior then after manipulating use Office
Button=>Convert to turn on again the Word 2007 behaviors. It can have side effects with other document features.

Another is to use Insert Tab=>Shapes=>New Drawing Canvas as described above.

Once items are created in the drawing canvas, if you drag them back into the Word 2007 document, they retain their Word 2003 type
identity.

While Word 2007 implemented part of the Office 2007 'Escher 2' graphics engine, it's not entirely clear if this behavior, where
graphic types switch by simply clicking on two of the, is intentional or an oversight in the program that keeps them from being able
to be worked as sets. Word still presents a 'Picture Tools' tab in Word 2007 (i.e. there isn't an 'Objects Tool'.

==============
A quick work around could be to place 4 rectangles filled  with white and
'no-line' on the edges and then group them with the objects  >>