External images not shown in Outlook 2003

All the users of one of my clients are unable to see images in email newsletters that are hosted externally.  When i right click the image to allow it appears that it's going to download the image and show it but instead it appears that a transparent image appears.  I right click where the image should be and select "save picture as" to find out it's a transparent.gif image.

I have adjusted the security settings and added the source to the safe list with no luck.  The fact that it substitutes the image with a transparent.gif really puzzles me, any ideas?

One more thing.  I coped the source code from the email to a html file and the images appeared just fine, it's only in outlook 2003 that this occurs.
menreeqAsked:
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EFernandesConnect With a Mentor Commented:
For some reason, the file extension gif may be blocked on the registry. check this:
1. Click Start, click Run, type regedit, and then click OK.  
2. Locate and then click the following key in the registry:
HKEY_CURRENT_USER\Software\Microsoft\Office\11.0\Outlook\Security
3. Check if there is a Level1Add key
4. Open it and verifiy the extensions (those will be blocked)
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menreeqAuthor Commented:
Thanks for the comment but i am not sure i undertsand step 3 and 4.  There is an entry named Level with a value data of 3.  What else do you want me to look for?
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EFernandesCommented:
In fact, if you have 3 that shoulnd't be causing any trouble. The meaning of the values are:

Other - (neither Level 1 or Level 2 - for example, zip files) - no safety issues, these files types can be freely attached to Outlook emails, and downloaded by the receiver of the email.  However, you are initially prompted to either open the file directly or to save it to a disk. You can turn off future prompts for that extension if you click to clear the "Always ask before opening this type of file" check box.

Level 1 - "unsafe" - the attachment is there, but invisible to Outlook (for example, exe files) - these attachments are blocked.  Systems with the MS Windows security update for Outlook 2000 and 98 or with Outlook 2002 will no longer be able to open or save Level 1 files if they are attached to an Outlook message. Again - the attachments will still be in the messages, but will be invisible to Outlook.  Other programs,  and even Outlook add-ins may be able to access them.  

Level 2 - medium risk - these attachments must be saved to disk first, before opening.  End users with Outlook 2002 or Office 2000 SP3 can demote a file type from Level 1 to Level 2.  But only administrators in an Exchange Server environment can customize the Level 2 list.  Below is a sample warning message that Outlook gives when a user tries to open a Level 2 attachment (in this case the attachment is aa executable file called "happy.exe"):
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EFernandesCommented:
what is the default file viewer definition for the gif extension in your Windows?
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menreeqAuthor Commented:
Windows Picture and Fax Viewer
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EFernandesCommented:
Do you have a firewall implemented (windows personal, antivirus, third party,...) that may be blocking outlook from using tcp?
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menreeqAuthor Commented:
We have a standard Linksys RV042 routers on the network, no other firewalls.  I don't see anything that in the firewall configuration that would be blocking it.  What do you make of the fact that when i copy the source to a html file it loods fine in IE?
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EFernandesCommented:
With a personal firewall the user could block tcp traffic for Outlook (that would use POP3 and SMTP) but allow IE (otherwise it would never have access to internet)...
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EFernandesCommented:
Can you post a some of the newsletter code?
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