TFS 2008 supports SQL 2008 SP1
SQL 2008 SP1 has just been released, and we’ve gotten a couple of questions about whether it is supported with with Team Foundation Server 2008. We tested SQL 2008 SP1 with both the original release of TFS 2008 and TFS 2008 SP1, and we do fully support using it with either release of TFS 2008.
[UPDATE 4/14/2009] If you are installing TFS 2008 and using an instance of SQL that already has SQL 2008 SP1 applied, you will need to follow the steps in the following KB article: How to install Microsoft Visual Studio 2008 Team Foundation Server on a computer that has SQL Server 2008 Service Pack 1 installed. This is required due to the version number for SQL 2008 SP1 being different than what the TFS 2008 SP1 setup logic expects.