Also, I have several Contact folders, but it syncs ALL of them - thus defeating the reason they're separated in the first place!
Sorry to hear you're disappointed -- as a long-time .Mac subscriber, I've been less than impressed with the rollout of MobileMe, myself. They do seem to be having some fairly serious issues on their end, so maybe they'll work things out in time.
As to your contact syncing issues, I don't have an iPhone to test this on, but this works on my SonyEriccson phone (assuming you're on OSX, that is):
- open iSync (in your Applications folder)
- select the device you want to set syncing preferences for, and a list of options for that device will appear
- under 'Contacts', you should see a pick-list which will correspond to the groups you have set up in your address book, select the relevant group and any other options you'd like
With some careful/crafty management of the groups in your address book and the settings in iSync, you can actually exert a pretty decent level of control over who/what gets sync'd (although I have no idea why they haven't moved all of this stuff into a Preference Pane)