WLM gives you the native option to create groups and places your contacts into as many groups as you want. Just open Contacts view (see the shortcut in the bottom left corner of WLM) to manage your contacts.
Hope this helps,
I am trying to set up a second group of contacts in Windows Live Mail. I have a group of contacts for my friends and church. Now I need to set up a second group of contacts for my engineering group. I do not want to mix them up together. Is there a way to have two different sets of contacts?