After some further investigation using a file monitoring utility, when I click the Choose Folders button, DesktopMgr.exe goes go out and hit various directories in lotus\notes\data\ even further pushing my theory toward a client side problem.
0.00005364 DesktopMgr.exe:5488 CLOSE C:\Program Files\lotus\notes\data\mail5\<myname>.nsf SUCCESS
0.00001006 DesktopMgr.exe:5488 CLOSE C:\Program Files\lotus\notes\data\ SUCCESS
0.00000866 DesktopMgr.exe:5488 QUERY INFORMATION C:\Program Files\lotus\notes\data\names.nsf SUCCESS Length: 26214400
I'm running notes 8.5, however my corporation said it is a supported version. It looks however as if desktop manager pulls your mail folders from your local design settings - which rules out connectivity issues.
Frustrating. Perhaps I'll downgrade notes if nothing else comes of it.