Custom Master Pages in WSS 3.0
After you edit your custom master page for site skinning, the next step is to configure your site to use it.
For creating a custom master page you can use one of the following links as templates;

• http://msdn2.microsoft.com/en-us/library/aa660698.aspx
• http://heathersolomon.com/blog/archive/2007/01/26/6153.aspx(recommended)

After you have downloadeded the master page go to your wss 3.0 site which you will change the master page.
Click on Site Settings -> Master Page -> Upload
and upload the custom master page you have downloaded previously.

After you have uploaded the master page the rest is easy.
Open Sharepoint Designer 2007, open your site, goto _catalogs -> masterpages.
Right click on your masterpage and choose "Set as Default Masterpage".
That's it.

I am looking for how to set the custom master page without the use of Sharepoint Designer,
will post it here.