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To get a Display Item to render as HTML, in the item definition Security section set Escape special characters to No.
For a report column, ensure the Display Text As report column attribute is Standard Report Column rather than the default Display as Text (escape special characters).
However in APEX 4.x, using a Display Image item and declarative BLOB support is preferable to such manual methods. Images can be formatted using the item HTML Form Element Attributes property, or via CSS.