Images look red in preview mode. Not sure what's going on??

First of all: I assume that you are not using the most recent version of Captivate (11.8.1) which means that you are still able to use the old Preview methods for a non-responsive project. Those 'old' methods are using a temporary SWF preview and will not be a correct preview for HTML output.

You can only use F11, Preview HTML in Browser to have such a correct preview.

Which type of images did you insert? JPEG, PNG, GIF? Do you have a graphics card, and if  Yes, is the driver updated to the most recent version?