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You need to locate the SecureTemp folder and delete the contents (or the entire folder) then restart Outlook. The images should display correctly once you do this.

The SecureTemp folder for Outlook 2000 to 2003 installed on Windows XP is at
C:\Documents and Settings\username\Local Settings\Temporary Internet Files\OLK*. The OLK directory will end in a series of numbers.

Outlook 2007 and Outlook 2010 places the Secturetemp folder at
C:\Documents and Settings\user\Local Settings\Temporary Internet Files\Content.Outlook\8A0VMD3A, where 8A0VMD3A can be any random characters.