I use Outlook 2002. Here is what seems to have fixed the problem for me:
Red X instead of image displayed in Outlook
Take the following steps:
1. Quit Outlook
2. Click Start / Run
3. Enter regedit and click on OK
4. Navigate to the Outlook Secure Temporary Items folder by following this
path: HKEY_CURRENT_USER\Software\Microsoft\Office\10.0\Outlook\Security
NOTE:
Depending on which version of Outlook you are using, the number 10.0 may be
different. I use Outlook 2002 and I found the file in 10.0. I think Outlook
2003 is 11.0. If there is more than one numbered subfolder in the Office
folder, I would choose the highest number first.
5. Double-Click on the key OutlookSecureTempFolder, It should be something
like:
%USERPROFILE%\Local Settings\Temporary Internet Files\OLK3D\
where OLK3D is some randomly generated string that always starts with OLK
6. Close the Edit String dialog box by choosing OK or Cancel
7. Delete the contents of the folder by right clicking it and choosing Delete
8. Exit the regedit program
9. Launch Outlook and check to see if images are still displaying with a red X