I work on a small web team where I am the only .NET developer currently using Visual Studio 2008 Professional to build and maintain a few web applications. I am about to st
Subversion has good integration with Visual Studio 2008 through VisualSVN and Ankh.
SourceSafe is dangerous. You're right that a filesharing-based SCM is a bad idea, and Microsoft themselves have downplayed it and replaced it with a new SCM that comes with the Team edition of Visual Studio.
Visual Source Safe has a bad rap from it's earlier incarnations. They came out with a new version in 2005, and it solves many of the problems of earlier versions. I don't think they've solved the branching problems though. They have a client/server portion now (well, it's http based) so that solves some of the remote issues.
SVN is probably a better solution, but VSS isn't as bad as it once was.
Subversion. Free. Visual SVN is a great add on, and is fairly inexpensive.
Team Foundation Server does satisfy your requirements of working with SQL Server, but is probably overkill for such a small development team.
I would recommend using Subversion (free) for source control along with VisualSVN ($49) for the visual studio integration. There is also an excellent Subversion client for windows explorer called TortoiseSVN, which is awesome.
The nice thing about giving something like Subversion a try is that it is free and very easy to set up. It will also scale up to a pretty large team. It is worth a shot before investing effort in MSFTs Team Foundation Server.
Definitely, as most people says, Subversion + VisualSVN.
VisualSVN is a fairly cheap addon at $49, subversion is free and very stable. We use that for teams of 10-15 people and it works really well for us. The only con is that it is file-system based.
On the other hand, if you have a very specific need for it not to be on the file system i would NOT recommend Visual Source Safe, on my last job we had a lot of trouble with it and lost precious days of work. If you want to go that way get something like sourcegear vault which is database based. There is also Team Foundation Server from Microsoft but I believe it is really expensive (and heavy) for small teams.
We switched over from SourceSafe to tfs recently and have found it to work quite capably.
The only notable exception in features we exercised is file linking.
To keep the costs down, we make sure that we get the Gold Certified Partner status.