Why am I getting the error "MobileMe does not sync with Microsoft Exchange Server"?
The Outlook configuration is precisely what matters here. As per the error you got: MobileMe does not sync calendars with Microsoft Outlook when Outlook is configured to use Microsoft Exchange Server.

Calendar syncing takes place via calDAV. The account settings are specifically IMAP.

Unless there are custom profiles or the Outlook PST file is damaged, I'd suggest simply removing the account from Outlook, and signing out on the MobileMe Control Panel, then setting it up fresh.