Did you do as per the Note in my previous post?
Assuming you've done that correctly, the main problem is that, since Word 2007 was released, Word has lost the ability to detect that the image referred to in an INCLUDEPICTURE field is missing so as to be able to suppress the output. The simplest workaround is to have a dummy image (e.g. white, 1*1 pixel) that you can refer to in your data source when the images are missing.
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Cheers,
Paul Edstein
[Fmr MS MVP - Word]
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