DARKSYDE said:
... it seems odd that we could look back at our universe when it was smaller yet we are still in it.
Good question that have also puzzled me. The key to understanding is the
expansion of curved spacetime.
Observable Universe
First, when talking about how "big" the universe is/was – we must remember to emphasize that it’s the
observable universe we are talking about. The whole universe might be infinite, we just don’t know yet. Some scientist’s claims that there is proof of a universe a least a thousand times bigger than the observable universe, and most agrees that the observable universe is 93 billion light-years in diameter.
Expansion of Curved Spacetime
This is quite complicated things involving the General Theory of Relativity. However, it can be understood by a layman on a basic level, omitting two dimensions of space, and focusing on one dimension of space and one of time.
The picture below shows how a light ray (red line) can travel an effective distance of 28 billion light years (orange line) in just 13 billion years. This also reveals the fact that
observable universe = calculated visible universe.
For more info, read
http://en.wikipedia.org/wiki/Expanding_universe#Understanding_the_expansion_of_space" on Wikipedia.
Looking Back at the Universe
What are we looking at? Well, everything that we see when looking 'back' is right here and now. The photon hitting the camera or the eye is right here, and not 'there'. Confusing? Actually it turns out to be even more 'odd'...
You refer to objects when the universe was 3.7 billion years old. The fact is that we can photograph the whole (observable) universe when it was only 400 000 years old! And it looks like this:
This 'baby-picture' of the universe shows the Cosmic Microwave Background (CMB) radiation (
the oldest light in the universe) and is produced by The Wilkinson Microwave Anisotropy Probe (WMAP).
More info at http://map.gsfc.nasa.gov/" .
Here’s a schematic picture of the history of the universe, showing CMB at 400 000 years:
How is this possible!? 
Get Serious
Well, now it’s time to get real serious and look at the basic mechanism:
1) Photons always travel at the speed of light relative to the galaxies near them.
2) As the universe gets older, the galaxies do not expand, but the distance between the galaxies gets larger.
[PLAIN]http://www.astro.ucla.edu/~wright/cphotons.gif[/INDENT][/URL]
The animation shows the expansion of space and the evolution of the galaxy density, positions and the photon positions within a '78 billion light year box'. Each black dot represents a galaxy, and the two green dots are galaxies emitting red photons.
http://www.astro.ucla.edu/~wright/intro.html" made this excellent animation, and you’ll find a lot more of useful info at his Home Page:
http://www.astro.ucla.edu/~wright/photons_outrun.html"
Good luck!
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