Updated 10/10/08
Special thanks to David Shephard for sharing the following fix: http://www.facebook.com/pages/NetIQ/17480979358. Did it work for you? I have since reloaded the entire app so I can't try it out.

Come to find out, this is a real fun error. After spending hours troubleshooting and Google'ing, I have found nothing. This is occuring on a WSS3 installation in AD Creation Mode. When I try to create a new user WSS creates the account in AD and emails the user but errors and will not add the user to the SharePoint site. If I create a user first in AD then
add them to the site I get the same error, but no email. The error below is displayed on the web page:

Exception Occurred. (Exception from HRESULT: 0x80020009 (DISP_E_EXCEPTION))

Below is from the diagnostic log

11/09/2007 10:05:01.51 w3wp.exe (0x0F24)                      
0x11AC Windows SharePoint Services   General                      
837l Exception An unhandled exception occured. Watson will be invoked.

Event viewer has nothing! Yeah, real helpful. As of 10:45AM EST I have placed a call for $259 to Microsoft Support for Windows SharePoint Services. This tech group is setup as a call back so I now sit and wait for them to call me within 24 business hours. So I'll update this once we get a result! In the mean time, if you have any ideas on how to resolve this, let me know!!!

12/19/2007 Updated with Fix
After talking with Microsoft and trying different ideas and methods, the fix is a horrible fix. To sum up, you need to export (using stsadm -o export) the entire application. Create a new web application on the same server, create all of the sites and sub sites for the structure to be in place, then import the application. Once the app is up and running, then add all of the users back in. Ta-da, done.

Here's why it's so horrible:
you need to export (using stsadm -o export) the entire application. The easy part, run stsadm -o export -url http://web -filename c:web.bak
Create a new web application on the same server easy too, use the central administration and create a new web application and site collection
Create all of the sites and sub sites for the structure to be in place yeah, so if you have 30 subsites in your app, good luck. I had about a dozen to work with and that was annoying. And when you create the new site you need to use the same template as the original. I wrote a little app that iterates through the site and catalogs info on each subsite. If you're interested, let me know (www.delphi-ts.com/contactus.html)
then import the application if you're lucky it will import all of the subsites as well. If it errors there should be a log written somewhere stating what went wrong. ANY WEBPART THAT WAS A XSLT VIEW MAY BE BROKEN! The export and import is very literal, and the old site had one GUID for a list and the new site has a different GUID, so when you import it, the XSLT data views all have the old GUIDs. So now you have to rename all of the GUID to the new GUID of the list.
Once the app is up and running, then add all of the users back in. Because SP is in AD Creation mode, you cannot select existing users in the domain (stupid!) so now you have to recreate all of your users and all of their passwords will be reset and probably will have the number affixed to their names, i.e. dlozzi5. Then all of the users will receive emails stating what their new accounts are. So either you can keep them with the numbering or use the migrateuser command in stsadm to migrate their numbers username to their normal user name. As you can guess, if you have 40 users this can be a pain, nevermind 1000+.
Ta-da, done. slamming head on wall

So this is Microsoft's fix for the issue. They don't know what is causing it or why it happens, but this is how to fix it, and I agree, it is fixed it. So I get to do all of this for $259.00! They don't know if it will happen again in the future. I have the joy of telling my customer this. Real confident.... I got lucky though, this happened while it was still in development so I had a dozen or so sites and 20 users. I can't imagine doing this for when this goes live (40+ sites, 2500+ users).