I've seen this issue a few times in the past few months, so decided to blog about this. When upgrading from SQL 2005 to SQL 2008/SQL 2008 R2 (or even from SQL 2008 to SQL 2008 R2), you might face an error with the in-place upgrade.

Open the setup logs folder (located in C:\Program files\Microsoft SQL Server\<Version -100 for 2008 and 2008 r2>\Setup Bootstrap\Log folder by default), and look for a folder with the datetime of the upgrade attempt. Inside this folder, look for a file named "Detail.txt".

Looking inside the detail.txt file, check for the following stack:

2013-01-21 11:16:42 Slp: Sco: Attempting to check if container 'WinNT://Harsh2k8,computer' of user account exists

2013-01-21 11:16:42 Slp: Sco: User srv_sql@contoso.test wasn't located

2013-01-21 11:16:42 Slp: Sco: User srv_sql@contoso.test doesn't exist

2013-01-21 11:16:42 SQLBrowser: SQL Server Browser Install for feature 'SQL_Browser_Redist_SqlBrowser_Cpu32' generated exception, and will invoke retry option.  The exception: Microsoft.SqlServer.Configuration.Sco.ScoException: The specified user 'srv_sql@contoso.test' does not exist.

   at Microsoft.SqlServer.Configuration.Sco.UserGroup.AddUser(String userName)

   at Microsoft.SqlServer.Configuration.SqlBrowser.SqlBrowserPrivateConfig.AddAccountToGroup(SqlBrowserPublicConfig publicConfigSqlBrowser)

   at Microsoft.SqlServer.Configuration.SqlBrowser.SqlBrowserPrivateConfig.UpdateAccountIfNeeded(SqlBrowserPublicConfig publicConfigSqlBrowser)

   at Microsoft.SqlServer.Configuration.SqlBrowser.SqlBrowserPrivateConfig.ConfigUserProperties(SqlBrowserPublicConfig publicConfigSqlBrowser)

   at Microsoft.SqlServer.Configuration.SqlBrowser.SqlBrowserPrivateConfig.ExecConfigNonRC(SqlBrowserPublicConfig publicConfigSqlBrowser)

   at Microsoft.SqlServer.Configuration.SqlBrowser.SqlBrowserPrivateConfig.SelectAndExecTiming(ConfigActionTiming timing, Dictionary`2 actionData, PublicConfigurationBase spcbPublicConfig)

   at Microsoft.SqlServer.Configuration.SqlBrowser.SqlBrowserPrivateConfigBase.ExecWithRetry(ConfigActionTiming timing, Dictionary`2 actionData, PublicConfigurationBase spcbPublicConfig).

2013-01-21 11:16:42 SQLBrowser: The last attempted operation: Adding account 'srv_sql@contoso.test' to the SQL Server Browser service group 'SQLServer2005SQLBrowserUser$Harsh2k8'..

 

The key thing here is the message "Attempting to check if container WinNT://Harsh2k8, computer of user account exists". If you see this message, go to the SQL Server configuration manager, right click on the offending service mentioned in the detail.txt, open the properties window and navigate to the "Log On" tab. Check the format of the service account here. It should be in the format domain\username. Change this to username@domain, and type in the password. After this, restart the SQL Service to make sure the changes have taken effect.

Try the setup again, and it should work this time.

 

Hope this helps.