Solution:
1. Exit out of Outlook 2003 on the machine with the issue.
2. Open the registry (Start->Run->type cmd->click Ok)
3. Navigate and open the following registry key HKEY_CURRENT_USER\Software\Microsoft\Office\11.0\Outlook\Security\OutlookSecureTempFolder
4. Within the key…it should say something like %USERPROFILE%\Local Settings\Temporary Internet Files\OLK3D\
5. Highlight and delete %USERPROFILE%\Local Settings\Temporary Internet Files\OLK3D\
6. Close out of the registry and open Outlook 2003!
7. Now the problem shall be fixed and show your picture on email.