OK your problem here is [b]WORD[/b] it's not the greatest thing since sliced bread and is causing your problems here.
Try this out to see if it works down the trial Version of Corel's Word Perfect Office X 3 from
http://www.corel.com/servlet/Satellite?pagename=Corel3/Downloads/Trials
Install the application and then open it in Word Mode [b] You'll see what I mean when you open it as you are prompted on how you want it to display[/b] and perform the Mail Merge in Word Perfect that should fix your problems and at the same time show you how a real Word Processor works. :D
You could also open it in its Native Mode and just import the Word Docs and do the mail merge that way but I think that you'll be more familiar with the Interface provided in opening it as Word.
What I think you'll find is happening here is that the entire field is being imported from your D Base and that is throwing the formatting out and preventing the graphics from being printed as well.
If you are not duplexing the letters would it be worth while just printing off the second page if it doesn't have any merge fields on it and then just telling the Canon to print the first page of the merge that may solve some of your problems with the formating and lack of Graphics printing. You could stack these in the Bypass tray and chose to draw the second page from there
if you are using the stapler in the finisher to staple the pages together or if you are not doing that you could just collate than on the fly and put them in envelopes as the first page comes out of the photocopier.
OF course if you have graphics on the first page they may not print but it might be worth a test run on a page or 2 to see what happens.