For some reason the sharepoint people picker in Sharepoint Services 3.0 was not seeing domain users. This could be due to this sharepoint install not being installed by a user with access to the domain (i.e. a local user). To fix this use the “stsadm.exe” command:
stsadm -o setproperty -url http://<webapplicationurl> -pn “peoplepicker-searchadforests” -pv “domain:<fulldomainurl>,<username>,<password>”
where the username and password are for someone with access to the domain.