I recently had an issue when I would embed an image in Outlook and it would look great. However, after sending the email the image became noticibly blurry and pixelated. I tried using the image as both .jpg and .png and neither worked.
I then came across this article http://www.howto-outlook.com/faq/unsharpimages.htm which solved the issue. The short answer is that the image needs to be created at 96 dpi because Outlook will reformat it to 96 dpi anyway. If it is not already at 96 dpi then it will become distorted. Check out the more detailed explanation below.
This issue usually happens when you are using a picture other than 96dpi.
When inserting a picture, Outlook will rescale the image as if it was a 96dpi image. This means that if you have a picture of 150dpi with a height of 88px, it will be displayed as an image of 56px high;
88px/150dpi * 96dpi = 56px
It even gets worse; upon sending, Outlook will convert and compress (re-render) the images to 96dpi with the new dimensions permanently! This means that all the “detailed” picture information is lost and you’ll be sending an image of 96dpi which is 56px high. This is of course a severe and very visible quality loss.
If your picture is less than 96dpi, then the opposite happens. A picture of 88px high with a dpi of 32 would then result in a 96dpi image of 264px high. So the result will be a very large image (but this time you can resize it back without the image becoming blurry).
This is a long outstanding issue/function/design choice which goes back all the way to Word 6.0 from 1993.
While this issue might not be a real issue when inserting pictures (which are usually too big anyway), it will become an issue when you have a carefully designed graphic to be used in a newsletter or signature; quality loss and unexpected changes in graphic sizes is not what you want then.