Today I had to test behavior of our less commonly used feature, get latest on checkout, in a mixed VSTS 2008 + TFS 2008 environment. Hopefully this blog post will save the time next person who wonders if this should work (It took me 3 hours to update my VS2005 hyperv image before I could actually try it).
First of all, a little about the feature. We resisted a long time before we gave up and implemented it in TFS 2008. We thought that it doesn't go well with TFS philosophy by we were convinced that we are wrong :) It causes client to download latest version of the file before pending edit in single web server call. It's both client side and server side setting.
Ok, now the actual finding. You need both VSTS2008 RTM and TFS 2008 RTM at the minimum to use gloc. If server is TFS 2008 and has this option turned on, but client is 2005, it will not take advantage of it.
Hope this helps!