This works in 2003, not sure about 2007: click on Contacts, where you have the list of Mail, Calendar, Contacts, Tasks etc (mine is at the bottom left of the Outlook screen). This should then show the Contacts folder in the blank bit of screen above it. Right click on Contacts, select New Folder and call it what you like. Then go back to your original Contacts, open the folder and then
drag and drop the ones you want to move.
If it doesn't work for 2007, my humble apologies!