I've noticed that working with groups within Illustrator tends to break some functionality. For example, I was not able to use 'align to key object' for the path I wanted until I removed it from its group and placed it in the top level of the layers.
My question is, what else does grouping break? Does anyone have a list?
I wouldn't say functions "break." By creating a group you are asking Illustrator to treat several object as if they are a single object. That's the purpose of a group. So of course you can't align things in a group.. Illustrator sees it all as one object. If you want to edit groups, you can use Isolation Mode.
What version are you working with? The align panel used to yield some wacky results when you tried to align items within the same group. It got improved some in cs3, like Scott said - get into isolation mode to do it.