I am unable to select a TFS server for TeamSpec unless the Word document is in the Docx (2007)format.  Is this by design?  Should this work with any Word format?

This is by design.  We use Word Content Controls to interact with the document and these are only supported in Word 2007.

Unfortunately, we cannot support any previous versions of word documents and any documents that were in previous formats need to be upgraded to Word 2007 format.  In addition, once you have content in a Word 2007 document, you cannot save it back to Word 2003 without losing all the TeamSpec information.

Cheers,
~Joe