Let's try this.
Start Outlook 2007 and place it in Work Offline mode:
File > Work Offline
Create a new Personal Folders:
File > New > Outlook Data File > OK > OK
Rename the Personal Folders as shown here:
Click:
OK
The new Personal Folders should appear in Outlook 2007.
Change the
Default Delivery Location.
File > Data File Management > Data Files tab
Select the new Personal Folders (Test) and click: Set as Default
A message will appear to let you know you are changing the Default Delivery Location.
When you click: OK the Default designation should appear beside the new folder.
If it doesn't, click: Set as Default again.
Click: Close
Close and restart Outlook 2007 (it should still be in Work Offline mode),
Remove the Address Book,
File > Data File Management > Address Books tab > Change
Click the Remove Address Book button, until the window is empty.
Click: Close, Close
Close and restart Outlook 2007, immediately attempt to configure the Contacts folder in the original Personal Folders to:
Show this folder as an e-mail Address Book
If that option is still greyed out, Remove the Address Book again. Remove all entries in the Address Book, close and restart Outlook 2007 and attempt to enable:
Show this folder as an e-mail Address Book
Hopefully, this was successful. If that is the case.
Return the original Personal Folders to be the:
Default Delivery Location, using the steps above.
Take Outlook 2007 out of Work Offline mode:
File > Work Offline
Let us know what happens.