After getting used to the full blown version of TFS (first 2005, and then 2008) I ended up doing an install of TFS Workgroup Edition to play around with to see if it would work for some smaller home projects. After setting everything up, imagine my surprise when I went to access it using a named account rather that the "TFS Setup" account. I received an error:
TFS 3011: domain\user is not a licensed user
Doh! A quick check of the global group membership settings and I discovered a "licensed users" group. I put my named account in there (the TFS Setup account was already there) and my problem was solved.
Hopefully this will help someone out who's exploring the TFS 2008 workgroup edition!