I send email from Outlook via Office 365 hosted exchange to my wife who uses Live Mail. If there are embedded pictures they do not display. Instead she gets placeholders like "[cid:XXXXX@XXXXXX.XXX]".
The email also shows a paperclip - but there is no evidence of an attachment which can be accessed. This problem started some months ago. Before that I would send emails the same way and she got them successfully. The problem may have started when we updated her Live Essentials.
The same emails are received correctly by other recipients.
I have (of course) checked all the security and other settings for Live Mail and reinstalled the whole Live Essentials package.
She does receive emails with embedded pictures from others and they work correctly. So, it seems to be something to do with the combination of Exchange from Office 365 sending to Live Mail. Also, it worked last year, so it seems to be something to do with the latest release of Live Essentials.