Turns out the issue was two fold. You need to patch the application files (the ones included on the installation DVD) as well. I had only patched the AOS server thinking I'm going to do a Synch. which will overwrite the AOT anyways. This got rid of the above error, but problems doing the data dictionary synch. started. Finally, I took the production AOT files and copied them into this devbox, now the TFS synch worked. I did a few test (checking in a change from a different devbox and doing a synch on this new devbox, and the changes were picked up).
Long story short, the TFS synch. doesn't seem to work if you are building an environment (RTM) from scratch and try to synch. an RU8 AOT in it.