[cookiecaper]

A few other commenters have explained it pretty well, but I think the main problem is that things get lost way too easily. Most filesystems are just way too vast and even the strictest user will eventually end up misplacing a few files. And when that happens, it sucks.

I think the solution is not to destroy the concepts of files and folders, but to become increasingly dependent on tagging and context-sensitive searches. Most DEs have shifted to this approach; there's Spotlight in OS X, whatever that search on the start menu is called in Win7, and various daemons/systems in Linux (Beagle, Nepomuk, etc.). There are third-party utilities too, like Google Desktop Search. As those things improve, and as we see more work to narrow the filesystem concept to only things that are usable to the user and allow automatic tagging of content, usability issues will go away.