I found where I made my mistake with the children's picture book formatting. I followed the instructions on a blog by Curtis Taylor- click here to read his instructions. They help you through the process by telling you how to format pictures and how to put the book together.
The mistake I made was not putting my picture folder that contained my HTML into a compressed zip file, so I could upload it to Kindle. If you don't do this, there are no pictures.
I did not use Adobe Dreamweaver. I used Microsoft office 2007 to make the webpage and drag the pictures over. It worked fine. It can be a time consuming process. Reformatting pictures and embedding the text take a while, but the results are worth it.
First format all your picture to 900 x 1100 pixels and work with larger pictures. Kindle reduces the size during the conversion. Embed the text with the picture, so you words stay with the picture. Remember to zip your file containing your pictures and your the webpage you create before uploading.
The Peanut Buttor Tweatment is in review on Kindle now and hopefully ready to be released soon.