In EndNote X2, by default the Groups Pane displays when a library is open. Some users are confused by the Custom Groups and the Smart Groups. Here is how they are different:
Custom Groups: manually created groups by the user to help organize his or her library. The user can drag and drop the references into a custom group which can serve as a subset of the library. The custom groups are listed alphabetically.
Smart Groups: created by a user with certain searching criteria to dynamically update groups as existing references are edited and new references are added to the library. It is similar to a canned search.
Filed under: EndNote X2 Features, FAQ