The iPhone does not use Outlook's contact Categories. Been a "deficiency" from the very start.
"Deficiency" in quotes because when I first started syncing to Outlook, I thought that was a real problem and I'd really hate having every contact in one master list. Turns out I was wrong. I prefer having everyone together. Much faster to use the iPhone's Search field or the alpha index.
The problems I have with putting contacts into Categories is that a) the appropriate category for a given contact changes over time and b) some contacts could be in multiple categories. I first met "Jim" when our kids started Cub Scouts together. We've coached Little League together. The kids currently go to the same school together (will change when they get to high school). I could have separate categories for Scouts, Sports, and School because there are people on those lists that I only know because of the corresponding activity. I have similar examples for people I knew at a previous company who have themselves moved somewhere else. But if I need to get a hold of one of them from my iPhone, I don't want to try to remember how the contact was categorized...I just find them my name.
QS