Hmm can't say I've tried on 2005 either.  One way would be via add / remove programs uninstall sql server db engine and re-install.  During install you need to ensure you choose a windows collation thats suitable for TFS, not sure of your region settings on the server but a suitable one would be Latin1_CI_AS. 

If I have time I might try to mod one here and advise if the add/remove allows a modification / upgrade to the colation or not.

Derek