After updating to Office 2008 12.2.7, many people have reported they are having problems with Entourage displaying embedded images in emails.
In most cases, the user had previously set their Entourage download pictures preferences from the default “In all messages” to either “In messages sent from Address Book contacts” or “Never” (Entourage->Preferences->General Preferences->Security). Making this change should result in a yellow bar displayed at the top of each email containing embedded images, containing a link to download pictures.
After updating Office 2008 12.2.7, Entourage seems to no longer display this yellow bar with the download pictures link. The only workaround is to resize the email window, which makes the yellow bar reappear, however this must be done on an email-by-email basis.