error message "Unable to display the user selection dialog"

Hi
On a Windows Server 2003 I'm having the problem where if I go to the
properties of any folder on any local drive and then go to the security tab,
and then select "add" I get the following error message appear with only the
option to select ok.
"Unable to display the user selection dialog - (null)"
The server has sp1 installed and is acting as a terminal server.
The server is connected to a local small business server which is looking
after the domain and active directory, etc.
At first I thought the problem maybe active directory on the small business
server but the sbs box is not having the same problem.
All users can log in fine to the terminal server and there are no errors in
the event log related to this.
How I discovered this problem is that I need to change the permissions of a
folder on the terminal server to get a program working but just by clicking
on add I get the error and can't get any futher.
I've found a few ms kb articles but nothing that end up being the same
situation.
I've also found alot of people posting on forms the exct same problem but
they haven't been on servers and/or with a domain.
Any help anyone can provide would be great
thanks in advance

Matt