I just created a new SQL Server 2008 server with Hyper-V and was in the process of setting up my VMs complete with AD. When I got to the point of adding a SQL Server 2008 to the mix I recieved the above error when I was trying to add the domain users as the service owners. Another odd thing was when I tried to add a domain account to a local security group it would say the user was added however I would not see the account show up in the group.
After rebuilding my AD and SQL 2008 VMs a few times I realized that when I ran SYSPREP on my baseline image I did not check the box called “Generalize” which removes all unique information like the SID. Hence, it appeared that I was running 2 machines with the same SID. After rebuilding my baseline image and running SYSPREP the correct way everything worked correctly.