Just as a follow up, I opened a support case with Apple on this topic because as stated my wife isn't/wasn't impressed with my Contact list. The fundamental problem is iCloud basically takes all the Contact Groups and moves them into the cloud which prevents you from selectively putting AB Groups on your phone from within iTunes. The resolutions was follows:
1. Close Address Book
2. System Preferences -> Uncheck Contacts (sync) (Note: Make sure you keep a copy on your Mac)
3. Wait an unspecified amount of time so that the contacts have time to sync up to the local Address Book.
4. Open Address Book (I don't believe that opening Address Book before your contacts sync matters) and verify that your contacts show up under 'On My Mac'
5. Reboot Mac
6. Open iTunes with your iPhone connected
7. Verify that you have a recent back up of your iPhone (iTunes Preferences -> Devices)
8. Goto 'Info' tab in iTunes under your iOS device
9. Check 'Sync Address Book Contacts' and leave it as 'All contacts'
10. Scroll to very bottom and check "Replace information on this iPhone' (assuming you don't want to Merge) Contacts sections
11. Click 'Sync' button
12. Once it completes the sync you should now have the option to sync only selected groups
I've added a feature (www.apple.com/feedback) to iCloud for the ability to sync iCloud AND to selected groups...or if they are so inclined the ability to sync selected groups with iCloud in general. This seems like a convoluted process to get this feature back but it works, I just wish Apple wouldn't change expected behavior for what I would think is a popular feature.
BivDog