Outlook 2003 and XP SP2

I've recently taken a dummy machine and formatted it,
reinstalling XP SP2 (from a slipstreamed CD) and started
from scratch. The computer exists in a domain in an
organizational unit having applied to it a GPO preventing
the use of Windows Firewall. Everything works great, firewall
is administratively disabled, but...
Microsoft Outlook 2003 (SP1) seemingly can't connect to
the Exchange (2003) server. During the initial "add
account" wizard it resolves the user names to their "full
name" just fine (and netbios server name to FQDN), but the
next step returns the error:

"Unable to open your defualt e-mail folders."
This error can occur if you attempt to run Outlook from a Terminal
Server session when the OST file is in use by the console session.
To access this instance of Outlook, exit the current Terminal Server
session and start a new session by using the following Run command
(click Start, then click Run):
mstsc.exe /CONSOLE

The error seems to think that I'm trying to run Outlook
2003 from a terminal server session, which I am most
assuredly not.

Any ideas? Outlook 2003 sp1 works fine on all other
machines without xp sp2.

Thanks for the help!! You're great for replying.