Just to be clear, you must install the final, released version of SQL Server 2005 to use Beta 3 Refresh. However, since it appears that only SQL Server 2005 Developer Edition is available for download from MSDN, you need to be aware of one extra step before you install Team Foundation Server. In Microsoft SQL Server 2005 Express Edition, Developer Edition, and Evaluation Edition, remote connections are disabled by default. In other editions, remote connections are enabled by default. To use SQL Server 2005 Developer Edition with Team Foundation Server, you must first enable remote connections.
From SQL Server Setup Help:
The Surface Area Configuration for Features tool provides a single interface for enabling or disabling Microsoft SQL Server 2005 services and network protocols used for remote connections. Disabling unused services and connection types helps to secure your SQL Server installations by reducing the SQL Server surface area.