Can't view Custom Templates in WSS

Only Administrators for a site can use custom templates to create new lists or workspaces. Even if you create a custom group and grant them all permissions they will not be able to use an custom template.

According to Microsoft documentation if you give any user group the right to "Create Subsites - Create subsites such as team sites, Meeting Workspace, Document Workspace sites" they should be able to create a site. However they can only create a site based on existing default template - not any custom ones you might have deployed.

To grant users the ability to use a custom template,
1. Log in as Administrator to the WSS site
2. Go to "Site Settings" > "Go to Site Administration" > "Manage Site Template Gallery"
3. Click "Modify Settings and Columns" in the left nav
4. Click "Change Permissions for this Gallery"
Here you will find that the list has unique permissions and no one except Administrator have permissions to do anything. You can choose to either "Inherit Permissions from the parent Web Site" or manually add users who you wish to be able to create lists, sites, workspaces based on custom templates.

To allow anyone other than an Administrator to create and save a template, grant that user the ability to Insert Items in the list.

This is because the template gallery is nothing more than a glorified Custom List with unique permissions. So merely granting them permission via Site Settings is not enough, since permissiosn are not inherited in this list.