Sometimes when I received an email in Outlook with an embedded image, the image would not display, but I'd just see a white rectangle with a small red "X" in it instead.
This was nothing to do with the outlook security settings.
To fix the problem, I deleted the following registry key:
HKEY_CURRENT_USER\Software\Microsoft\Office\11.0\Outlook\Security\OutlookSecureTempFolder
After I deleted it, I restarted outlook, and my images now appear fine.
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