[Updated 2008-06-29]
I finally got around to upgrade our TFS to 2008. Since it went well I thought I'd share my setup experience.

To upgrade from TFS 2005 to 2008 I used the following procedure:

1. Update the server to the latest service packs. I would recommend an upgrade to TFS SP1.
2. Run the Team Foundation Server Best Practices Analyzer from the Team Foundation Server Power Tools. This will make you aware of any (major) issues in the current installation.
3. Read the TFS setup guide. Yes, this may come as a surprise But honestly, reading the guide will help a lot. I wouldn't do a TFS setup without using the checklists from the guide!
4. Make sure you have working backups. And of course make sure that they work! Always do a disastery-recovery procedure to verify that you know how to get a broken installation up again.
5. Make sure you have enough disk space. Look at the database files and make sure there's at least that much space available on disk (thanks to Thomas for mentioning this).
6. Uninstall Team Build 2005 (if applicable).
7. Uninstall Team System Web Access 2005 (if applicable).
8. Uninstall TFS 2005 (although it's not necessary for a single-tier configuration, there's nothing wrong in cleaning up before the upgrade).
9. If you have configured TFS to run on a different port than 8080 then either change it back to 8080 before the upgrade or edit the AT\msiproperty.ini file on the installation media so that the property VSTF_WEBISTE_PORT=8080 points to the correct port.
10. Install TFS 2008. The setup will detect the existing 2005 installation and upgrade the services and databases.
11. Install the Team System Web Access 2008 (downloaded from here).
12. Upgrade Windows Share Point Services from 2.0 to 3.0. There a walk-through on MSDN on how to do the upgrade here (thanks to Stuart for mentioning this!). I optimistically skipped to run the WSS Prescan tool (downloaded from here) but that wouldn't fool the upgrade tool.
13. Run the SharePoint Products and Technologies Configuration Wizard to complete the wizard.
14. Upgrade TFS with the Windows SharePoint Services Extensions from the TFS media.
15. Update the existing Team Project sites to the new look-and-feel. Peter has written a good post on how to do that. 

The procedure took about 4 hours on our server to complete. The impressions so far it that (apart from a very smooth upgrade) it performs very well. Noticably faster than TFS 2005!