Someone asked the same question of four Microsoft guys from the Whidbey team who gave a User Group talk (VBUG) a week or so back in London.
Everyone agreed that VSS was pretty crap and well past its 'sell by' date!
The gist of the discussions that followed was that internally some test groups (small projects) used Visual SourceSafe but most of development didn't use it. It certainly isn't used for Visual Studio development (I vaguely remember a comment about Visual Studio comprising
about 40GB source code).
The Microsoft guys seemed to be well aware of the problems with Visual Source Safe and revealed that there have apparently been several attempts at writing a replacement within Microsoft, several of which have "crashed and burned".
The subject of WHEN an updated source control system (mentioned at PDC?) was brought up and someone said it had been revealed at PDC that this would be released in the Whidbey time frame. The reaction was very much one of "Oh no it won't" and that we should
be looking for something more like the Longhorn time frame (if that?)for any replacement for the ailing VSS.
It was all a bit depressing on that front - clearly not a big priority.