As I understand it, it's a markup language (same concept as html, but richer) for defining user interfaces. I doubt it'd replace winforms, it's probably implemented under the hood with winforms and I wouldn't be surprised if there were bindings so that you could make your own ui components with real code and then reference them from xaml.
As an example of what a gui markup language can do, firefox's (and I believe seamonkey's too) entire interface is written in xul, which is similar in concept. On the whole, I can't see it being a bad thing, particularly if the standard is open enough to make xaml useful for cross platform development.