You may receive an error message when you try to set permissions for a distribution group in Outlook 2007 or Outlook 2010

You cannot set folder permissions for a distribution group in Microsoft Office Outlook 2007 or Microsoft Outlook 2010. Additionally, you may receive one of the following error messages:  

Error message 1
Error message 2
If you try to add a distribution group as a delegate, you may receive the following error message:
Additionally, the prohibition sign appears next to the distribution group. The prohibition sign is circle with a line through it.

This issue occurs because you are not permitted to set folder permissions or object permissions for a distribution group in Outlook 2007 or Outlook 2010.

To work around this issue, create security groups instead of distribution groups. Then, set folder permissions or set delegate permissions for the security groups.

This behavior is by design.

In earlier versions of Outlook and of Exchange Server, the Microsoft Exchange Information Store process automatically converts a distribution group to a security group.

For more information, click the following article number to view the article in the Microsoft Knowledge Base:
For information about how to manually convert universal distribution groups to universal security groups, visit the following TechNet website:

http://blogs.technet.com/b/ehlro/archive/2010/05/11/automatic-converison-of-udg-in-usg-in-exchange-2007.aspx