I’m not 100% sure it wasn’t always this way and I never noticed… but I’m pretty sure this is new and something got messed up somewhere.
I am able to assign work items to a user named LOCAL SERVICE (see screenshot) in TFS 2008 (Workgroup Edition). This seems wrong, but I have no idea how to fix the issue.
It’s not the end of the world, but it’s bugging me.
Thanks in advance for any help.

By default the Assigned To list comes from the members of the Team Project group called “Contributors”. If you right-click the Team Project, choose Team Project Settings and then Group Membership and check the members of the Contributors group. If you can’t see it in there try using TFSSecurity.exe:
Regards,
William D. Bartholomew (Team System MVP)