I have solved this with the guy from GFI.
I ran the following Exchange shell command:
New-OWAVirtualDirectory -OwaVersion:Exchange2003or2000 -VirtualDirectoryType PublicFolders -Name "public" -WebSiteName "Default Website"
This created the public virtual directory in IIS, and the GFI process to scan public folders then worked.
I can also now browse to localhost/public.
The only thing that bothers me is that we had to set it up as OwaVersion:Exchange2003or2000 .
I am hoping this doesn't throw up another problem.
I tried setting as type Exchange2007, but I got this error.
New-OwaVirtualDirectory : VirtualDirectoryType parameter does not apply to Exchange 2007 virtual directories.
Parameter name: VirtualDirectoryType
At line:1 char:24
+ New-OWAVirtualDirectory <<<< -OwaVersion:Exchange2007 -VirtualDirectoryType
PublicFolders -Name "public" -WebSiteName "Default Web Site"
Thanks Terry