The GOOD news:
Your iPhone (or iPod Touch) full supports having your contacts sorted into groups right in its own contacts application.
The BAD news:
The iPhone comes with no interface for this function, so until now you haven't been able to group your contacts right from your iPhone.
Enter "Contact Grouper". An application with an easy to use interface that allows you to sort your contacts into groups. After you have added one or more groups you'll see a "Groups" button right in your phone's contact application.
Contacts can be part of more than one group, so you are in full control of how you would like to organize your contacts. For example, you might put a co-worker in both "Friends" and "Work". You can add as many or as few groups as you would like!
Keep your contact list simple and organized with Contact Grouper!