First this story is pure speculation built on information presented on what is publically available on WinFS.
Since Longhorn originally was only going to be a client release. WinFS was focused on the client picture. This was pretty much confirmed by Bill Gates in the Q&A at the Office developer conference. Watch the Keynote from that conference.
Given that focus, WinFS is a client side workgroup enabler, IOW it is has designs around a domainless workgroup and excells in that enviroment. It breaks down in a domain Server Client enviroment where a Central IT department will want total control.
After PDC 2k3 there was an outcry of putting WinFS on the servers. which brought us to the situation that WinFS was going to be in Beta, when LH client was released. and released when the LH servers were released a year later.
Here is some interesting issues. it was during that time and then the announcement that WinFS wouldn't be ready that certain items were released from the Language development teams and the Data teams. That item was a Compiler from Microsoft Research called C Omega.
There is some pain with OO languages interacting with xml platforms and relational platforms. (Hmm sounds like WinFS doesn't it) If that is resolved at the language level it would make for a more performant data access layer.
I personally believe from information presented and some observations. (the Office developers conference points to it, listen to the interview). We know that the Universal File store will be based on a modified form of Sql Server. Share Point Services appear to be the first item that MS claims to be built on a universal File store. It will modify to the real one as it is released.
On the Server side. we know that in 2k3 at least AD is built on the Jet engine. and it was just announced that exchange 12 will have a modified jet engine for it. for a Universal file store to work both of those will have to change sql server based store. We know that isn't going ot happen by LH server in 2k7.
So given the state. WinFX 2.0. will have a clr that will be based on a data implementation that C Omega has shown. what it looks like in the end will be different that C Omega. as it will be cross language solution. we know that it will be cross language based from the interview with anders on Channel 9.
I believe that by the R2 dates of LH client and server that we will see the implementation and conversion to the Universal file store. The client side will have athe WinFS API. server side will have a different api name but will be compatable some what. the new Data tier and persistance layer (known as Object spaces) will also have a different look and feel.
Comments.??