Distribution Groups in Active Directory

When I create a Distribution List for my contacts under 'Public Folders' through Outlook I get the following error:

"The distribution list has reached the maximum size for your network e-mail server. No new members could be added."

When I create the Distribution List in Active Directory I right click on the newly created list and select "Add Exchange Public Folders". I select the Public Folder that has my contacts but it does not add all the items within the folder. It just adds the folder itself. This seems useless.

Any ideas??