You are aware that if you add a Distribution group  from AD to SharePoint it
automatically expands the list to the constituent users. Since a Distribution
group doesn't have a SID its only a way of specifying a whole list of individual
users. The group is NOT maintained in SharePoint and people  added to the group
later won't be added to SharePoint.

Precisely, so adding them one time doesn't keep the list current should the
membership of the A.D. group  change. I need the People Picker to look up against
my Distribution Lists as well as Users, Security Groups, and SharePoint Groups.

I think you can only use security groups  with the people  picker. Can you
convert the DG's mail enabled security groups?

If it doesn't have a SID, you can't assign permissions to it. That's in
SharePoint, Windows, whatever. I'm not sure that's exactly what the
original poster is asking about though.

That is one suggested answer, however, the admin  side of the house is
loathe to change Distribution groups  to Security Groups. We have a lot of
investment in tightly controlling security on all of these groups.

This is documented in all kinds of places but it's all through code. I wonder if
I could set the SelectionSet property  in the 12-hive once and for all?

This is controlled by the SelectionSet attribute of the PeopleEditor control on
the ACLinv.aspx page in the Template\layouts directory  of the 12 hive. If you
edit the value of that attribute to add 'DL' to the comma delimited list then
the page will return distribution  groups in addition to other entries. However,
trying to add the distribution list to a sharepoint group  will generate an
error, so changing the PeoplePicker to return distribution lists won't help you.
You just can't use distribution lists in sharepoint  2007 this way.