Sounds like the email's being sent as a plain text email, rather than a rich text/mime encoded type.
Either that or the destination is set to allow/read text email only.
OR.. one last thought...
if your using outlook/outlook express, is the sender in the safe senders list? If not, then outlook won't download any images for the email.
In summary, check if it's your script, or the recipient that's got the issue before trying to debug the PHP code, which if it's an established download probably works fine.