Update: For more recent guidance on this topic, see this post.
Another frequently asked question around Team Foundation Server – does it replace Microsoft Project Server?
The short answer – no, it doesn’t. Team Foundation Server specializes in individual team project, project management (what a funky combination of words), whereas Microsoft Project Server specializes in enterprise project management of many resources spanning multiple projects.
Team Foundation Server does have project management features such as work item tracking, reporting and project planning & tracking. However, the project planning and tracking features are due to the integration with Microsoft Project.
Team Foundation Server is not a replacement or a substitute for Microsoft Project or Project Server. In fact, it depends on Microsoft Project to enable the user to build a project plan and keep track of it.
Team Foundation Server simply connects the project plan to the “code engine” so that the project manager can collaborate more effectively with his team members (because he can publish tasks directly from the project plan into Team Foundation Server) and can be more productive (because the team member makes updates in the tool they use, Visual Studio, and the project manager can bring those updates into the project plan more easily).
Thanks to Siddharth Bhatia for his help answering this question on an internal e-mail thread and Joel Reyes for raising the question.
Update (October 2005) - There's a project on GotDotNet to help demonstrate how to use these two products together: http://workspaces.gotdotnet.com/projectservervsts.