On the Exchange side Public Folders are configured to use NTLM Authorization. It needs to be changed to use HTTP Basic Authorization.
To do this, go to the Exchange server and select the Control Panel-->Administrative Tools, then open Internet Information Services.
Under Default Web Site there is a tab for Public Folders called Public. Right Click and select properties. Click on Directory Security Tab. Select "Edit.." on the Anonymous Access and Authentication control panel. Unselect everything else and select only Basic Authentication.