You can populate the profile database with fields from AD. You can also have secondary providers to fetch data from BDC (Business Data Catalog) or you can have users themselves enter data into fields that are not bound.
Configuration is done in your Shared Service Provider.
Start by configuring the properties you want to have shown on your user profiles, including privacy policies, group it into categories and sort the fields (this task is very tedious and time consuming if you use the GUI, so i recommend using a tool like the one created by Gary Lapointe (search for gl-importprofileproperties) or a PowerShell script).
Now configure AD as your data source using LDAP query to your AD.
If you want secondary data from BDC you need to set up BDC, set user rights on BDC and configure your secondary data source.
Now configure indexing and you are done.
Data will now show up on user My Sites and My Profile sites as configured in SSP.
The above is from top of my head, so i might have missed a step, but it should give you the basic idea.