[DLCPhoto]

Well, just to finish off this thread, for anybody who might have similar needs and questions, I went ahead and completed the Outlook transition and sync:

I can verify that only Contacts in the main folder, and none in any of the subfolders get synced, at least using Windows Mobile Device Center, 64-bit, Vista Home Premium. I suspect this is across the board with 32-bit, as well as XP/Active sync.

I left the default setting ("Show this folder as an email Address Book") selected, and it worked just fine. I still don't know exactly what deselecting this would do, but I didn't need to mess with it for the sake of what I was needing to do here.

When synced, it maintains the Category assignments I made in Outlook, so I can filter my Contact List on the phone, which comes in handy.

Finally, the primary .pst file does contain all the Contacts and sub-folders, Calendar, etc. I installed Outlook 2007 to my Laptop, created the same .pst folder name, and then just copied the .pst file from my desktop to the laptop, and everything was there. To keep these synced, I'll just need to periodically copy that file over. Works just like I need it to.

Hope this might be of help to someone.