Think I found the answer to getting Contacts arranged with Last name first!
Jack... I had the same thing happen to me. Really pissed me off too. I hope you sync contacts with Google or an exchange server (as I did). The only solution I found was to delete all the contacts and re-sync. I suggest a few steps in the deletion process. First, when in People and All... go to Menu, Delete, Menu, Select all. Then go into Settings, Applications, Manage Applications. Find and select the contacts storage and delete cache and data there also. Then re-sync. This should make sure there are no lingering contacts in storage and no duplicates when you re-sync.
It works!!!!!!!!