UPDATE:
See below for the original description of the problem (Outlook 2007, 2010, etc. not allowing proper inline responses because you can't break the blue "quote line" on the left), but I have finally found a way of dealing with this problem in a satisfactory way!

If anybody notices anything I've got wrong or left out of this solution, please add a comment to this question and tell me.

Here's the solution:

First up, as far as I can tell, there is no way to fix this problem when the message format is HTML, and I think that is the root of the problem, as pointed out in an answer to this question which I've accepted as the answer ( thank you Peaceplease :-) ). Something about Outlook's HTML format prevents the quote line from being broken. However, this does not apply to rich text format! In fact, it may well be that the whole reason one could break the quote line by defualt in Outlook 2003, but not 2007, was that 2003 used rich text by default and 2007 used HTML by default; I'm not sure on this, but in any case, making sure the message is in rich text format in 2007 and 2010 (and presumably, future versions of Outlook) will mean that the infernal blue quote line can at last be broken. :-)

So, the solution begins with making sure all messages you send are in rich text format instead of HTML (rich text offers all the markup any e-mail should need, IMHO; if you need HTML in an e-mail you're probably trying to do something where an attachment would make more sense!)

As I currently have Outlook 2010 installed on my system I'm going to show how to do it in Outlook 2010.

• First, make sure new messages are always in rich text by going into File | Options, selecting Mail, and choosing "Compose messages in this format: Rich Text":

• I also saw an option below about sending messages in Rich Text format to "Internet recipients", which I set to "Outlook Rich Text format" for good measure:

• However, this still doesn't fix the whole problem. Presumably because Outlook doesn't consider other users using Outlook internal to your intranet to be "Internet recipients", it will still reply to those messages in the format they were received in (probably HTML). We need to force these to be converted to rich text when we reply or forward them, too.

TODO: VBA script for doing this?!

TODO: then use Ctrl+Q to break the blue line for inline responses, and example images of this being done.

ORIGINAL DESCRIPTION OF THE PROBLEM:
This has to be the most infuriating regression from Outlook 2003 to 2007. It also exists the same in Outlook 2010, as far as I can tell.

When you reply to an HTML e-mail message in Outlook, the quoted text has a blue line down the side, and is usually at the bottom of the message:

Now in Outlook 2003, when replying to HTML-formatted messages in Outlook, you used to be able to reply inline quite easily, by getting to the point in the quoted message you wanted to reply to, and pressing the 'decrease indent' button:

Since Outlook 2007 (and 2010), they replaced the e-mail editor with Microsoft Word. This means the blue line is implemented in a different way; it uses a blue left border. This makes it tougher to break the line up. After much ado, I found a couple of pages that said that you could remove all formatting by pressing Ctrl+Q, which would remove the blue line next to the cursor and allow inline replies:

OK, not too bad on the face of it. I can live with that. But here's the kick in the teeth; try sending that mail. I'll send it to myself. What do I receive? This:

Outlook 2010 reinstated the blue line, where I had removed it, upon my sending the e-mail! For God's sake! The two pages I linked to above don't seem to address Outlook's reinstating of the blue line upon sending.

So, does anyone know how you can actually reply inline in Outlook 2010 (or Outlook 2007) e-mail without the blue line being reinstated? Before anyone says, I do not want to convert the message to plaintext, and I do not want to just indent replies and have to manually build the blue line myself. I want something like the Outlook 2003 behaviour; I reply, Outlook creates the blue line, and I can break it up with inline replies, send it, and my inline formatting stays.