The subject behavior is due to SP2 making security changes to Outlook 2003, which causes smart tags to NOT persist in Outlook.
To fix this problem:
1. After installing Windows XP SP2, install Microsoft Office 2003 SP1.
2. Open a CMD.EXE window.
3. Type the following command and press Enter.
REG ADD "HKCU\Software\Microsoft\Office\11.0\Outlook\Security" /V AllowSmartTags /T REG_DWORD /D 00000001 /F