I don't understand this-- why do distribution lists have limited
usefullness?

The amount of effort involved in maintaining a distribution list of even moderate size can be considerable (and tedious).

What besides a distribution list would I use to send email
to specific groups of people?

a) Mail merge
b) Select contacts, choose Actions | New Message to Contact

Second, the better solution would have been to create a public folder, not another mailbox. All the hosted Exchange services that I know can handle that.


I can look into this. As long as the distribution lists in the public
folders can be used in the address book _and_ the distribution lists
can have permissions set on them then I assume this solution will work
fine.

Only distribution lists in Active Directory (i.e. what you see in the Global Address List) can have permissions set on them. Folders get folder-level permissions, not item-level permissions.

I had called them and asked the best
way to share distribution lists amonst our engineers and this
"functional mailbox" solution was the one I was told is the best way.

They must not know much about how users actually use DLs.

--
Sue Mosher, Outlook MVP
Author of Configuring Microsoft Outlook 2003
http://www.turtleflock.com/olconfig/index.htm
and Microsoft Outlook Programming - Jumpstart for
Administrators, Power Users, and Developers
http://www.outlookcode.com/jumpstart.aspx