MSN - HowTo Hide Offline Contacts
First, you can click on the up and down green arrows button, next to the [Add a contact] button, and in the menu that pops up choose "sort by status". This has the disadvantage that you loose the organization by group, of course.
Second, with Messenger window selected, press the Alt key to display the hidden menu and select "Contacts" --> "Filter contacts" --> "Online contacts only". That way you preserve the group sorting in a shorter list. If you want the shortest list possible, which does not display a list of offline contacts, select also "Sort by status". Now that you have this super filtered list, you may wish to select "Show contact details" if you want more context.
Lastly, if you are using Windows Vista and want to put the SideBar into good use, without having to place Messenger over it to keep an eye on your contacts, you could install a gadget for Windows Sidebar called Messenger Gadget. This gadget is able to show the list of just online contacts, while MSN remains minimized in the Windows tray. As in the main MSN window, you can click an online contact in the gadget box to open a chat window. Moreover, Messenger Gadget can show an unobstrusive new email counter.