Hello Chris,
Recently we have been able to upgrade the dependent 3rd party components that allowed me to continue my work on this bug. I have implemented changes to address this specific problem and after I have tested it it finally generates mail-friendly HTML code.
Note that I have added a "Mail Friendly HTML" checkbox to the ToadReport activity that is visible only when you select HTML file name as the output - you need to check it to make it work.
Martin