Procedure to follow
1. First you need to close your Outlook.
2. Click Start, and then click Control Panel.
3. Double-click Mail, and then click E-mail Accounts.
4. Click View or change existing e-mail accounts, and then click Next.
5. Select the Microsoft Exchange Server account, and then click Change.
6. Clear the Use Cached Exchange Mode check box.
7. Click More Settings.
8. Click the Advanced tab.
9. Click Offline Folder File Settings.
10. Click Disable Offline Use, and then click Yes in the dialog box that appears.
11. Click Offline Folder File Settings.
12. Click Browse, go to the location where you want to save your .ost file, and then click Open.
13. Click OK.
14. Select the Use Cached Exchange Mode check box.
15. Click Next, and then click Finish.
This took me almost two hours of investigation to finally nail down.