The list can be almost anywhere, as long as Word can recognize it as a database format (database or spreadsheet lists are most common). It can even be in another Word document as long as you have a header row.

In 2007, click on the mailings tab and just start working your way across left to right. First, choose the output format, then the source of the names, and finally, "edit recipient list". If the list has a lot of names, you can deselect them all (top checkbox) then use the find recipient link near the bottom of the box to jump to the spot in the list that you are looking for.