This issue occurs when using Visual Studio 2005 or VS 2008 without the compatibility update installed. If you already installed the compatibility update then its possible that the URL used is incorrect. Verify that the URL for TFS meets the following format http://YOURTFS:8080/tfs . If you have not installed the update you will need to do so in the specific order below.
Visual Studio 2005 to TFS 2010
The process must be completed in the exact order to work.
Visual Studio 2005
On the Visual Studio Toolbar go to Tools and select Connect to Team Foundation Server
Select Add and enter the server details http://tfs2010:8080/tfs
*The Connection Details on the screen should gray out after entereing the URL. If this is not the case, then the “Forward Compatibility Service Paack” has not been installed or the order it was intalled is incorrect. *
Visual Studio 2008 (The Same process as above with the following software below)