I've just comprehensively proved to myself that this is strictly a notional implementation. You can generally get it to work, if you jump through enough hoops, but it's just not worth it.
The functionality, and prerequisites, appear so closely predicated on the solid case, that it's massively easier to build a solid 'rail', fillet it, then convert it back to surfaces.
If you choose to disregard this recommendation, it will help to know what is meant by a 'laminar edge' (cryptically raised by the software to thwart you at every opportunity, and not mentioned in 2008 Help. Back in 2003 it rated a brief mention, which is how I knew what it meant).
It means that (in this particular case) both the junction of the two face sets you choose, AND the far edges which define the two hold lines, cannot be open edges. What's more, they must be knitted to the adjacent face, outboard of the hold line. It is laborious to provide the necessary "skirt" surfaces if the topology is even slightly interesting, and everything then has to be trimmed and knitted together. Surfaces which are simply a continuation of the face sets for filleting, (which will probably be available in the model) cannot be used, because when you knit to them, your hold lines will vanish....(This behaviour may be different in SW2010?)
These skirts are automatically provided if you create a solid of rectangular cross section, per the graphic ... which shows very simple geometry.Naturally, the difficulties with surfaces compound considerably with more interesting shapes.
Other tips: make sure you select 'Curvature continuity' if you want 2 hold lines. Otherwise there's no toggle to select to tell it you want two hold lines; it's just a matter of picking enough edges to define the two lines. In the solid case, this often requires only one edge from each side.
Finally a plea to Solidworks: PLEASE include the terminology raised by error messages in Help.
Also it would be great if there was some control over the spline profile for a 2-rail fillet, even if it was just an 'elliptical' option.
Message was edited by: Andrew Troup added clarification that edges must be knitted to avoid the "laminar edge" error, added rider re 2010 change