Could you clarify which contact folder your using? Folders from the Public
Folders group aren't accessible via any standard Outlook processes so not
sure how you got even 397.

Alternative suggestion for using contact data in PF group:

#1 - Create a new contact folder in your primary Exch mailbox or some PST
file and copy the contacts to this new folder. Do your mail merge from
there.
           (would think this to be the quickest & easiest approach based on
description) OR...
#2 - Do the above and export the data you need using Outlook's export wizard
OR ....
#3 - Use a 3rd party product that can export directly from any Exch public
folder (i.e. ContactGenie Exporter - link below)

Karl

 http://www.imibo.com/imidev/Exchange/imice.htm

IMI Contacts Exporter  for Microsoft Exchange Server is specially designed
for Microsoft Outlook users to export Contacts from any Outlook and/or
Exchange Public Contacts Folder (or private Mailbox folder) to MS Access
2000 table or MS Excel file.

 http://www.imibo.com/imidev/Exchange/imice.htm