For a farm configuration no. For a single server (or server + SQL) it
can be done, but I don't believe it's fully supported.

Sorry, missed the 2nd half of the question  and I need to clarify a
little. The machine, app pool, etc accounts  must use AD in a farm, but
you can use most any source you like for end user  authentication,
authorization and profiles. The caveat on non-AD source for users it
that you will need to use Forms Based Authentication in most cases,
which have some limitations on things like integrations with the Office
clients.

If you don't mind me asking, what limitations? We are considering
going to FBA and we are just in the investigative stage. So I don't
have a real goldmine of information. Also we are using WSS3 not
MOSS.

There's a pretty good overview at
msdn2.microsoft.com/en-us/library/bb977430.aspx . The only
difference of any consequence between WSS and MOSS with respect to FBA
(other than being able to ignore some differences that only affect
MOSS-specific functionally) is that MOSS includes a couple extra
providers out of the box that you'll have to create yourself if you use
WSS.