Anonymous Authentication not available in Outlook 2007

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I deployed Office 365 in an office of about 10 PCs. All went smooth except 3. It kept on popping up asking for username and password. I investigated and the only thing I could come up with was that these 3 PCs were upgraded from Office 2003 to Office 2007 where as the others were not.

 

So I tried to setup Office 365 manually but came across one option that is not available. On my previous setups of O365 I've noticed that Autodiscover sets the network security to Negotiate Authentication where as in the more recent ones it sets it to Basic Authentication. Well it turns out on these 3 PCs Basic is not available. I've attached a snapshot. Could this be why Autodiscover setup is failing in Outlook 2007? all updates are installed as well. I tried removing, full clean up of Office and reinstall but still same issue. This cannot be a group policy because one there's no group policy for Office, and two if it was, all machines would be affected. Please see image below:

 

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