staffingpro,
Outlook can be confusing - not all straight forward - hopefully this will help.
Right click on your Contacts folder (not the one in your Personal folder),
left click on "New Folder".
A pop up dialog box comes up that shows your Folder Hierarchy.
You can see here if you have any sub folders in your main contacts folder.
You can click on any folder there - such as contacts, or Personal Folder Contacts etc.
When you click on the folder in the dialog tree view list - you are choosing where you want your new folder to go - You give it a name at the top Name Field Box, and click OK. If you chose "Contacts" as the folder you chose to create the new Contacts folder, that is where it will be - but your new folder should show up in your contacts list. To see the hierarchy again, you will need to chose Folder View, or File new Folder - which will show you the Folder View / tree view hierarchy.
(To get to Folder View - click on Go > Folder - hope it is that way on 2003).
Or you can click at the very bottom left under your folders.
Under your Mail, Calenar, Contacts, Tasks folders - if you put your cursor over the icons - one of them should have the text show up as "Folder List".
Click that and you can see the hierarchy of all your folders.
Once you have your new folder created and named - you should be able to open your other Contacts folder in Personal Folder or wherever, and click on one of the contacts there, then click CTRL + C (together), then click into your newly created folder, and click CTRL + V (together) and that shoud populate the folder with your contacts - and it should be by default - selectable in your - Address Book that comes up when you click on your "To:" Button in a new E-Mail Message.
I am using Outlook 2007 - But I believe all of this is the same in 2003 - as I scratch my head and try to think back.
Distribution Lists are altogether different - You create them from contacts you already have. So Distribution lists have no folder in your folder list, but are listed within your contacts folders. They basically are a shortcut grouping off whichever contacts you choose to group into lists.
Good Luck!
Chronk