Check to see if you're using a smarthost. This can be configured in 2 places in Exchange 2003:
- SMTP Virtual Server - Administrative groups -> administrative group name -> Servers -> server name -> Protocols -> SMTP -> Right click on default SMTP virtual server, go to properties -> Delivery tab -> Advanced. Check the smarthost entry
- The connector - Administrative groups -> administrative group name -> Connectors -> right click connector name, go to properties. See if "Use DNS" is checked or "Forward mail through smarthost" is checked.
If you have smarthosts set here, disable them, then try again.
Also, check that the localhost is allowed to relay. Go back to the SMTP virtual serve properties, click on access, then relay, then ensure "Only the list below" is checked and 127.0.0.1 is in the list.