My Word 2007 resizes images to 125% of their original size so that they appear blurry. It happens when pasting from different programs. It also happens in my Outlook emails and my calendar events. How can I fix this?

Hmm... Interesting issue. I just tested my word 2007 with couple of small images which I copied then pasted in word and they appeared exactly the same size as the original images. I wander if maybe your document/view settings are set to view 125% zoom of the actual document?

I don't think they are. Here's a screenshot: