Before attempting to synchronize your contacts, ensure that your installation of Outlook is fully updated. Connect the iPhone to your computer and allow iTunes to launch. If a message appears asking you to download an update for iTunes, do this. After the update is installed and iTunes restarts, click the iPhone icon on the left side of the screen under the "Devices" list. Click the "Info" tab, then put a check in the box labeled "Sync Contacts With." Use the drop-down menu to select "Outlook." Click the radio button labeled "All Contacts" to sync all of your contacts, or the "Selected Groups" button if you only wish to import certain groups such as friends or business associates. Note that your Outlook contacts must be in groups in order for this feature to work. Click "Apply" to import your contacts from Outlook into your iPhone.
Note that your Outlook calendar can be synchronized as well from this screen, and that this process works for synchronizing contacts on the iPod Touch as well as the iPhone.