Sharepoint Services 3.0 with SP2

You can try adding a connection between your sharepoint and domain:

User Profile Import Service
http://msdn.microsoft.com/en-us/library/ms585156(v=office.12).aspx

Also, when you're adding someone from your domain, you're using:
DOMAIN\samaccountname , right?

HTH,

Dale Harris

Is your SharePoint server part of the domain?

If your SP farm is on the domain, you'll definitely know it (I mean, aside from checking the networking properties.  You can go to any site or list and add a user, like "domain\username1".  Don't do this in the "People Picker", just do it in the box.  Then click the check box.  See if it resolves.  If it resolves the name, then it's talking with AD.  If not, then we'll have to look at why not.  Either you haven't set up your User Profile Service yet, in which case SharePoint would not have discovered the account yet, or perhaps you don't have the UPS sync set to run nightly for incremental backups.

Yes, I agree with Koen.  Check to see if your SP Server is a member of your domain.  This would definitely provide the authentication necessary to add users or groups.

Also, just an afterthought, but if the servers AREN'T part of the domain, you would have had to pull a few strings to get it to use local accounts during setup.  So you should definitely know if it IS or ISN'T part of your domain at the moment.  Local accounts in SP2007/2010 are a pain sometimes, to say the least.  They definitely take some configuring to get everything to work correctly, so it should be one of those easy "yes or no" issues.

If it IS part of the domain, i would definitely check to see how your UPS and UPS Sync are configured.

You can let your people picker connect to another domain, but if you only have one domain adding it to one domain will be a lot easier:
http://blogs.msdn.com/b/joelo/archive/2007/01/18/multi-forest-cross-forest-people-picker-peoplepicker-searchadcustomquery.aspx

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