One would typically put the full DNS (host) name of the Exchange Server into the incoming and outgoing server fields. For example, mail.yourdomain.com. This is most common with POP3 mail servers, so you'll need to make sure to open the Exchange Server to POP3 access.
After performing a quick Internet search, I discovered iPhone screenshots showing that iPhone direct synchronization with Exchange Server is supported.
When setting up a new account, select Other and then specify Exchange Server. Enter the host name as I described previously, and also enter the required credentials.
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You should verify that IMAP is enabled on the Exchange server, and then verify that the firewall is configured to allow IMAP traffic. Finally, there is a setting on the IMAP server on Exchange to "allow fast IMAP." That should be turned on for the iPhone.
Taking these steps will not provide a good experience, though. I've found that the iPhone is a very troublesome device when connected to Exchange. The two just don't work very well together. Maybe this has changed with the new device, but in my experience as an Exchange admin, the iPhone was a very bad choice for mobile corporate email.
With that said, the best advice would be to return the iPhone and get a Windows Mobile device instead. Verizon offers the Samsung SCH-i760, which is probably the best mobile phone on the best network in America. If the user wants to stay with the AT&T network for some reason, then they should consider the AT&T Tilt or the Samsung Blackjack II.
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More resources on how to sync an iPhone and Exchange:
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