I had this exact same problem with trying to connect Outlook 2007 to
Exchange 2003 running on Windows 2003 SBS.

I found that a lot of other people are having the same troubles and I
tried some of rememdies that were offered, but nothing solved the
problem.

I finally solved the problem by only adding the full name of the
Exchange server to my hosts file.

Example hosts file:

Before
10.10.10.68 svr001

After:
10.10.10.68 svr001
10.10.10.68 svr001.company-lab.local

I didn't have to do this with Outlook 2003, but this did fix the
problem I was having with Outlook 2007.