Active Directory users not listed when trying to add users to SharePoint Foundation 2010

You're right... out of the box, having SharePoint groups with thousands (or even hundreds) of individual users will be an administration nightmare.

Unfortunately SharePoint doesn't sync AD users with with AD (profiles, yes. users, no.), so once you have manually add a user to a SharePoint group or manually grant permissions to an individual user, they will remain in Sharepoint for all time (until you manually remove them), even if you remove that user from AD.

If you assign permissions to SharePoint groups holding AD groups, you gain the benefit that once a user is removed from AD, they no longer have permissions on SharePoint. It is so much easier to manage group membership in a single location (with good tools) than it is to manage group membership twice.

Long story short, I would suggest trying to figure out the problem you are hitting with audiencing before I would suggest putting a thousand users in SharePoint groups. If you absolutely must do so, don't do it with out of the box tools... invest in Quests's Site Administrator for SharePoint (http://www.quest.com/site-administrator-for-sharepoint/)

If you are setup with the Windows authentication method, that hooks up your authentication to the AD domain that your WSS server is in.

Typically you will want to use Integrated/NTLM authentication so that people on computers in your domain will be automatically logged in with their machine credentials. (People not in your domain or not using IE will need to type in their username/password)

Your users should not need any specific privileges on the Sharepoint server - but you may need to add Domain Users (or nt authority\all authenticated users) to the Users group on your SharePoint machine.

Here is Microsoft's planning guide for WSS authentication: http://technet.microsoft.com/en-us/library/cc288475.aspx