Check out this article in Computerweekly:
Microsoft officially informed the world about dropping WinFS right here: http://blogs.msdn.com/winfs/archive/2006/06/23/644706.aspx
So what is WinFS?
"WinFS is the code name of a Windows storage subsystem, being developed by Microsoft for use on its future Windows (c) Operating System. WinFS is a relational database located on NTFS and representing itself to the operating system as a file storage subsystem. The codename WinFS stands for Windows Future Storage.
WinFS intends to link the worlds of traditional relational databases, objects, XML, and file systems of unstructured documents with the concept of metadata over files. Instead of representing a file solely by directory path and filename, WinFS represents individual domain objects - e.g. images, e-mails, address book entries, and any kind of regular file - with indexed and searchable context and keyword information.
The underlying system is based on Microsoft SQL Server (c) database engine. WinFS provides access to data through both traditional file-based APIs, and new object-based approaches that take advantage of the new features. Applications that are not written to take advantage of WinFS can access the contents of a WinFS Store through a regular UNC path."
There will no longer be a WinFS Beta2, WinFS!
Microsoft still maintains that many of WinFS functionality will show up in other Microsoft products - like Katmai SQL Server!
I am not going to hold my breath on this one!