Help RE : Contacts problems


I've got a new LG Optimus Black Model number LG-P970 with Android 2.2.2 as the operating system.

I am specifically having problems with contacts. I have managed to copy my backed up contacts from my google account to the phone. However - I cant seem to figure out how to create a distribution list in the GROUPS section ? I have a default folder called " All Other Contacts".
When trying to add contacts to a group - I am asked to select from this folder only ? At the moment - there seems to be only one contact under the foler " All Other Contacts" and im not sure how to add other members ? im really stuck.. can someone please kindly advise on how to add more members under the default folder " All Other Contacts" ?

Kind regards,