For the dynamic parameter, you should use a command, using a left function--depends upon your database though, which you haven't identified.
Select left(table.field,2)
from table
Or maybe it would be:
select {fn left(table.field,2)}
from table
Use this to populate the dynamic parameter picklist. Do NOT, however, reference the field in the main report, and do not link the command to any tables in the main report. There you should just use a formula for your group:
left({table.field},2)
-LB