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For Team Foundation Server 2008 deployment, if you are using SQL Server 2008, you might be facing the issue, saying “A compatible version of SQL Server is not installed.”

The reason is because the Team Foundation Server 2008 installer is not patched with Team Foundation Server Service Pack 1.

So, what you need to do is patched the TFS installer with SP1. Here is the instruction:
1. Download SP1 from the Microsoft Web site, and save the update to a folder on the local computer.  For example, you can save the file to C:\SP1Download.

2. From the files that originated on the DVD for Team Foundation Server, copy the AT folder to a location on the local computer. For example, you can copy the folder to C:\InstallMedia.

3. Open a Command Prompt window, and type the following command, replacing C:\SP1Download with the location that you chose in step 1 and C:\SP1Extract with a separate location on the local computer: C:\SP1Download\TFS90SP1-KB949786-ENU /extract:C:\SP1Extract

4. Create a folder where you can merge files from SP1 and the DVD.

5. Type the following command, replacing C:\InstallMedia with the location that you chose in step 2, C:\SP1Extract with the location that you chose in step 3, and C:\MergeFolder with the absolute path of the location that you chose in step 4: msiexec /a C:\InstallMedia\vs_setup.msi /p C:\SP1Extract\TFS90sp1-KB949786.msp TARGETDIR=C:\MergeFolder
You must replace C:\MergeFolder with an absolute path, but you can replace C:\InstallMedia and C:\SP1Extract with absolute or relative paths.

6. From C:\MergeFolder (which you created in step 4), run setup.exe to install Team Foundation Server with SP1