Word 2003: Red "X" displayed in place of embedded pictures/graphs/cliparts in Word document

Symptoms Observed and Error Message
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When a user opens a word document all embedded pictures/Graphics in the document  are replaced with the a blank box and a red "x" at the top left corner of the picture holder.

No error message is observed. However right clicking the blank box with the red "x" can display error messages like "Picture is corrupted", "The server application, source file, or item cannot be found", etc.

Cause and Resolution
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There are more than one reason for this :

Situation 1:

A document is opened from an Internet location, from a Web folder, or from any location that the Microsoft Windows redirector recognizes as being from the Internet security zone.

Situation 2:

User account created under Windows 2000 and later migrated to Windows 2003. User has a roaming profile. Word files are located on a File Share in a central location. When this user tries to open a word document stored on the central File share using Word 2003 SP2 on a machine running Windows XP SP2.

Inference
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This issue may occur when either of the following conditions is true:

- The Content.mso folder does not exist.
- The Content.mso folder has insufficient permissions. These permissions prevent
users from writing to the folder.

Resolution:
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To resolve this issue, make sure that the Content.mso folder exists and that all users and processes have full permissions to the folder. By default, the
Content.mso folder is a hidden system folder that is located on the computer under C:\Documents and Settings\User name\Local Settings\Temporary Internet Files

 

Related KB - https://support.microsoft.com/Default.aspx?id=897693