heres a bit extra info for those who may run into the following errors:

CRJAZ0808I The driver "com.microsoft.sqlserver.jdbc.SQLServerDriver" could not be loaded and registered. Support for some database vendors requires that the JDBC driver JAR be provided in a path configured by the server scripts. If you are experiencing problems changing the database vendor, refer to the product setup instructions for more information.

or

Java Runtime Environment (JRE) version 1.6 is not supported by this driver. Use the sqljdbc4.jar class library, which provides support for JDBC 4.0.

When configuring WAS to use an MS SQL server you need to download and register the server 2 places: windows and in WAS JVM custom properties.

Download the version 2 driver from MS (version 3 is not supported in writing moment)

create a directory called sqldriver in your installdir sample:
D:\Program Files (x86)\IBM\JazzTeamServer-rtcz2.0.0.2ifix5\server\sqlserver

copy the sqljdbc.jar from the folder you downloaded from MS to this directory. If your WAS uses java 1.6 then you need to copy the sqljdbc4.jar and RENAME it to sqljdbc.jar

Create a custom property called SQLSERVER_JDBC (not with a - or a D)
with the value of your sqlserverdir like:
D:\Program Files (x86)\IBM\JazzTeamServer-rtcz2.0.0.2ifix5\server\sqlserver
in WAS 7.0.0.7 its found under(Application servers > server1 > Process definition > Java Virtual Machine > Custom properties)

create a windows environment veriable called
SQLSERVER_ABSPATH also pointing to this path.

both the paths are standard paths not urls

WAS need a restart to register the jvm properties (restart windows also to register the environment variable)

Hope this proves helpful