I don't believe that an Exchange public  Folder is required. You do specify an
Active Directory OU where email enabled  accounts will be created. I've had
trouble getting SharePoint Groups mail  enabled but lists  work pretty well.

Exchange Public Folders are not required - in fact I'm not sure there's
a way to use them even if you wanted to. What is required is a
dedicated email address per list and a dedicated dropbox folder  just for
email meant for lists. The dropbox can be in either SMTP or Exchange
export formats (the latter requiring a custom receive connector).

Without Exchange, you have to install the SMTP service from your
Server 2003 disk on your WFE servers. When the SMTP server gets
mail, it will route to a list by address such as
MyList@....

The Directory Management Service is optional. For us, it was not
worth the effort.

Check step-by-step paper here on configuring this, both for Exchange
2003 and 2007:

http://www.combined-knowledge.com/Downloads%202007.htm