This just spent me couple hours to find out, that you won't be able to install TFS 2008 SP1 on SQL Server 2008 SP1 by just following the Installation Guide.

Even you've installed SQL Server 2008 and applied SP1, and followed Installation Guide to slipstream TFS 2008 Installation media with TFS SP1 bits, you'll still not able to install TFS, installer will keep telling you that your SQL Server is incompatible!

The solution, via bharry's blog, directed to this KB article, telling you that you have to modify the version check xml setting file in order to let the installer pass through the version check and install it.

Remember to read this before you install your own TFS 2008 SP1 on SQL Server 2008 SP1!!

the key modification points are (from the KB, for reference here):

5. Open the Hcpackage.xml file by using Notepad.

6. Find the following entry:

<WQL namespace="\\.\root\Microsoft\SqlServer\ComputerManagement10" query="SELECT * FROM sqlserviceadvancedproperty WHERE ServiceName='[%VSTF_SERVICENAME_MSSQL%]' AND PropertyName='VERSION' AND PropertyStrValue&gt;='10.00.1433' AND PropertyStrValue LIKE '10.00.%'" action="=" count="0" />

7. Replace the entry that you found in step 6 with the following entry:

<WQL namespace="\\.\root\Microsoft\SqlServer\ComputerManagement10" query="SELECT * FROM sqlserviceadvancedproperty WHERE ServiceName='[%VSTF_SERVICENAME_MSSQL%]' AND PropertyName='VERSION' AND PropertyStrValue&gt;='10.00.1433' AND PropertyStrValue LIKE '10.%'" action="=" count="0" />

8. Find the following entry:

<WQL namespace="\\.\root\Microsoft\SqlServer\ComputerManagement10" query="SELECT * FROM sqlserviceadvancedproperty WHERE ServiceName='[%VSTF_SERVICENAME_MSSQL%]' AND PropertyName='VERSION' AND PropertyStrValue&gt;='10.0.1433' AND PropertyStrValue LIKE '10.0.%'" action="=" count="0" />

9. Replace the entry that you found in step 8 with the following entry:

<WQL namespace="\\.\root\Microsoft\SqlServer\ComputerManagement10" query="SELECT * FROM sqlserviceadvancedproperty WHERE ServiceName='[%VSTF_SERVICENAME_MSSQL%]' AND PropertyName='VERSION' AND PropertyStrValue&gt;='10.0.1433' AND PropertyStrValue LIKE '10.%'" action="=" count="0" />

10. Find the following entry:

<MsiProductVersionCheck prodid="[%SQLServer2008%]" action="&lt;" version="10.1" />

11. Replace the entry that you found in step 10 with the following entry:

<MsiProductVersionCheck prodid="[%SQLServer2008%]" action="&lt;" version="10.2" />

12. Save the Hcpackage.xml file.

13. Run Setup.exe to install Visual Studio 2008 Team Foundation Server with SP1.

FYI.