I found this in the Help & Training, I was having this problem before and I think this might've solved it.  That, or they gave me a new computer because we couldn't figure it out... :-\

Before upgrading to Salesforce.com Mail Merge with Windows Vista and Word 2007 compatibility, please perform the following steps:

Note: You must be logged into your PC as a Windows user with sufficient administrative privileges to change the settings described. If you are unable to make these changes, please consult your internal IT Administrators.

    1. Open the Microsoft Windows Control Panel. For Windows 2000 and XP users, click 'Add or Remove Programs.' Windows Vista users should click 'Programs and Features.'

    2. If present, remove the program 'Salesforce Mail Merge.'

    3. Open the Internet Explorer web browser.

    4. IE 6 users:

        o Click Tools | Internet Options to open Internet Options dialog.   

        o On the General tab, click 'Settings' button in 'Temporary Internet Files.'

        o Click 'View Objects.' The file directory 'C:\WINDOWS\Downloaded Program Files' will open.

        o Delete following items if present: 'CMMHost Object' and 'SFCom Control.'

    5. IE 7 users:

        o Click Tools | Manage Add-ons | Enable or Disable Add-ons.

        o In the 'Show' drop-down list, choose 'Downloaded ActiveX Controls (32 bit).'

        o If the following items are present, select one at a time and click 'Delete:' 'CMMHost Object' and 'SFCom Control.'

        o Click 'OK.'

    6. Close Internet Explorer.

***Note: As a workaround, close all Microsoft Office programs and then try to create the mail merge document.