Outlook uses Word for performing mail merge functions such as Form Letters,
mailing labels, envelopes, and fax or email merges. For an overview of these
functions take a look here:
http://www.slipstick.com/contacts/printlabel.htm
http://www.outlook-tips.net/howto/mailmerge.htm
http://office.microsoft.com/en-us/assistance/HA011269731033.aspx#preview
http://office.microsoft.com/en-us/assistance/HA010349201033.aspx

Since you already have your Contacts organized by Categories, use the "By
Category" vies of your Contacts Folder to filter your Contacts, then start
to merge from Outlook to the Contacts you have selected in that view.

Thanks for your response!  I tried that and it still wants to merge all the
categories not just the selected category.  I had to put in about 2 hours of
work doing the merge from word and using contacts and having to go through
and select everyone individually because from word it won't let you use
categories either... very frustrating - should be easier!