Aaron Hallberg : Team Build and 260+ Character Paths
I finally ran into this today--my build wouldn't execute because my path name was longer that 259 characters. I had my root directory named "<drive>:\builddepot", and a really long name for my build (i.e. avoid "Adventureworks Supercalifragilous Debug Build with Testing and Code Analysis" for your build definition name). Fortunately, you can rename your build to something shorter. With the new TFS 2008 build agents, you can also specify that the build agent should use "$(BuildDefinitionId)" instead of the name so you get "C:\bd\123" instead of "C:\BuildDepot\Adventureworks Supercalifragilous Debug Build with Testing and Code Analysis". One of the things that was the final straw was that the database files in my project had awfully long names.
Also, remember if you're building a database project that you need to have the database edition installed on your build server.