The only reason I see is that "g:" drive is not recognized/not connected properly. If you can issue the net command, what "net use" gives you for g:?

>Found a/the solution but I have no idea why or how it works!!!
>On the workstation there is a mapped drive to the application folder. On the desktop we create shortcuts with a path like g:\app\myapp, also the start in is set correctly - when the app is launched from this shortcut we have the error when mail merging to Word. Out of sheer desparation we created a shortcut to the app with the unc path ie. \\server01\shared\applications\myapp - launching the app from this shortcut gave us no problems with the merge...
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>Any ideas why this makes a difference???