The issue is that Exchange 2010 Global Address List GAL not being the default view for outlook 2010 address list.
After setting up a new mailbox, everything seems to be working fine as expected. once outlook is restarted, the default view of Address List changes to All Groups and OAB is also showing only All Groups while offline.
I have created and applied Address Book Policy to few users. the results are same.
Exchange 2010 'ShowGalAsDefaultView' value is set to True for all users.
Exchange 2010 SP2 Rollup 3 migrated from Exchange 2007.
Outlook 2010 SP2 on windows 7 Enterprise.