Why do I get an "This distribution list has reached the maximum size for your network e-mail server" error message when you try to add another contact to a Contact Group/Distribution List?
Whilst it is possible to add 500 individual contacts to an email in the to: cc: or bcc: field, Contact Groups work slightly differently. The size of a Contact Group is limited not by number of items but by the file size of the group itself. This essentially means that they are limited to an undefined but finite length of up to 120 to 130 contacts. Microsoft recommends that Contact Groups are no more than 50 to 70 contacts in length.
The Microsoft knowledgebase contains more information about this http://support.microsoft.com/kb/23856.
For information on how to sent an email to more than 500 recipients, please see the information on creating Contact Groups/Distribution lists which outlines the various options available to you.