Found this which fixes the problems TFS Service Pack 1 creates

From: http://www.codefounders.com/community/blogs/davidg/default.aspx

Before you install TFS SP1 it informs you that you need to download and install another update first which puts the TFS server in a quiescent state so that there is no activity going on on the server whilst the update is performed, otherwise the TFS database may become corrupted. Once this in place then you can do the update, which works correctly. The problems seem to stem first update puts the server in a quiescent state by applying an IP address restriction to the entire web server used as the application tier front-end so that it can only accept requests from the localhost address (if you have other web sites hosted on this server, like our main company website for instance, this really isn't funny, though I appreciate that was probably the easiest way for the VS team to achieve the behaviour they require for update.) It also modifies some of the TFS databases and places them into single-user mode. My guess is that at the end of the SP1 update these changes are supposed to be undone leaving the TFS server in its original state.

On our server, the IP address restriction was not removed from IIS and four of the TFS databases (TfsActivityLogging, TfsBuild, TfsIntegration and TfsVersionControl) were left in single-user mode. Manually temoving the IP address restriction using inetmgr and resetting the four databases back to multi-user mode using SQL Server Management Studio fixed the problem and all is now working as it should. Having finally brought TFS back to life, I have to say that it was definitely worthwhile installing SP1 as there are some noticeable performance improvements, and I haven't even had a chance to really play with it yet.