Great, glad your installtion succeeded.
TFS can not retreive credentials from a non-AD domain.
Yes, each user you want to uniquely identify in TFS will need to have a local account on the TFS server. If you have several people who will just need reader access, you could combine them on one account, but I am sure you will want to have developers, testers and admins individually identified. Please note that this is not in any way related to a licensing discussion.
Wendell
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