Yep, same behavior here. PC is running Windows Vista. I've updated iTunes to 7.7 and the iPhone is a 3G with firmware 2.0.
I can select Google Contacts, then configure with Gmail ID and password. It does not populate any of the groups I have in Gmail Contacts. The option is low-lighted and cannot be selected.
Syncing with the iPhone moves all contacts over, which I then had to repair because of Google's current contact handling. Google is in the process of changing the default contact handling where anyone that you reply to is automatically added to the contacts. See more about this here:
http://googlesystem.blogspot.com/2008/07/gmail-to-no-longer-auto-add-contacts.ht ml
Folks over at Howard Forums are also reporting this same behavior of missing groups within Yahoo.