However, the Check Names function does not honor the Peoplepicker-onlysearchwithinsitecollection setting. For example, if you enter a user name in the People Picker text box and then click Check Names, the entered user name will be looked up in Active Directory by the ActiveDirectorySid resolver.
To resolve this issue install the hotfix package that is described in the following Microsoft Knowledge Base article:
For more information, click the following article number to view the article in the Microsoft Knowledge Base:
961750 Description of the Windows SharePoint Services 3.0 hotfix package (Sts.msp): February 24, 2009
After you install this hotfix, you will be able to force Check Names to look up users from the site collection only. You have to use stsadm or SharePoint Object Model to add new users to the site collection after this new behavior is enabled. Also, you have to follow these steps to set the new PeopleEditorOnlyResolveWithinSiteCollection property and to enable the new behavior on a Web application:
Visit the following Microsoft Web site and download Windows PowerShell: