In the past Gmail has hidden images in email messages by default. If a user wanted to see images contained within a message, they had to click "display images below" to get them to show up.
This policy is still in place for messages from unknown recipients, but now images will automatically be displayed if they come from a contact. More specifically, if you have emailed a person at least twice, you will see images from them without having to click the "display images below" link.