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Suggestion: In Outlook, create a folder for all those contacts you don't want on your phone; call it something like Unsync Contacts; then click and drag all the ones you don't want from the Contacts folder to the "Unsync Contacts" folder. When you connect up the phone, only the people in the "Contacts" folder will be synchronized, and all the others will be removed from the phone.
This has nothing to do with categories and might have some unintended consequences in Outlook. (Just like Activesync, some of the Outlook search functions look only in the Contacts folder by default, ignoring the other folders unless you take positive steps to look in them. Outlook address book might be similarly affected.) (BTW, I used Outlook 2007 for no more than I month before getting fed up and returning to 2003; it's much better for how I work.)
Edit: 500 contacts really does seem minimal. I have over 1000 contacts synced to the phone, and the lags for contact lookups are fractions of a second (once pocket outlook is open, that is).
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