Update: My post Upgrade TFS V1 to WSS 3.0 Guide and Upgrade TFS V1 to WSS 3.0 round 2 - TFS SP1 became obsolete, because Microsoft is delivering their own guides on MSDN now. I even reviewed parts of this guides and tested everything on different machines with different settings.
You can find both guides at this link TN1501: Configuring Windows SharePoint Services 3.0 on the Visual Studio 2005 Team Foundation Server Application Tier or TN1502: Configuring Windows SharePoint Services 3.0 on a Remote Server to work with Visual Studio 2005 Team Foundation Server Furthermore you'll need an additional hot fix for your Team Explorer to connect to WSS 3.0 correctly. You can find more info about this at http://support.microsoft.com/kb/932544.
Last Monday I read a post of Brian Keller about Configuring Visual Studio 2005 Team Foundation Server with Windows SharePoint Services 3.0. I wondered which posts he was referring to by reading "There are even a few posts in the community from people who have demonstrated how to get WSS 3.0 working with Team Foundation Server".
This morning I received a personal email of Brian explaining why he didn't mentioned mine name in the first place. He didn't want me to feel like Microsoft came along and discounted something that somebody in the community did because that's really not their intention at all. They are just trying to come up with a solution which enables WSS 3.0 but lets your TFS deployment remain serviceable.
I experienced myself that TFS is not serviceable anymore after upgrading to WSS v3 using my own guide. When I upgraded our TFS environment to SP1, it took me several hours to complete this job. TFS is really searching for a WSS 2.0 site and can't service a WSS 3.0 site. In another post I described my adventure and how I managed to make WSS 3.0 a bit more serviceable. See http://bloggingabout.net/blogs/mglaser/archive/2006/12/20/upgrade-tfs-v1-to-wss-3-0-round-2-tfs-sp1.aspx.
This afternoon Brian Harry added a new post about this issue as well. See Configuring TFS to use Sharepoint 2007. He explicitly thanked me and requested me to give a taught about this solution. I like the idea, so the next coming weeks, when I have some spare time, I will investigate and test this.
Knowing now that my own post was referenced I feel flattered and hope to help MS to publish their final document on MSDN. Maybe some day my dream about TFS will come true.