Ah ,
I see what you mean. It disregards the "don't download" when you reply and
in the reply message shows all the pictures. I hadn't noticed that before
but you are correct.

I can't seem to find any other options that could  affect it.

>From the M$ Site:
"How to forward, reply to, or edit an e-mail message that contains blocked
external content
If you have the Don’t download pictures or other content automatically in
HTML e-mail option turned on, and you want to forward, reply to, or edit an
e-mail message that contains blocked external content, you must download the
full body contents of the e-mail message. When you try to forward, reply to,
or edit an e-mail message that contains blocked external content, you
receive the following warning message: 
To complete this action, Outlook must download content from a server other
than your e-mail server. This could verify to the sender that your e-mail
address is valid and increase the amount of junk e-mail you receive in the
future.

If you click OK to the warning message, and subsequently download the
previously blocked content, Outlook 2003 does not provide any method to
block or re-protect the message as it was originally presented. After you
download the content, the next time that you try to close the e-mail
message, you are presented with an option to save the changes to the
message. If you click No to this question, this prevents permanent changes
to the e-mail message, and leaves the original e-mail message with the
content still blocked."



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