This issue has been identified as a product defect, and is being evaluated for a later release of Active Roles Server.
TF00641221: Unable to locate 'contact' objects from within distribution group.
1) Add the Contact to the Distribution Group via the 'Member of' selection of the Contact
2) Add the Contact to the Distribution Group via the Active Roles 7.0 MMC Console
This Product Defect (TF00641221) has been fixed in the latest available maintenance release, you can get more information from its ReleaseNotes:
Active Roles 7.0.3 - Release Notes