The bad news is that we won't have WinFS when Longhorn ships. The good news is that we'll have Avalon and Indigo in WinXP. We developers will be able to use those technologies sooner as we won’t need Longhorn clients. Indigo was supposed to work on XP but Avalon was not.
From the marketing point of view, I think they made the right choice. They'll sell more Longhorns because of Avalon than because of WinFS, so if they need to drop one, WinFS was the logical choice. That's because Avalon is a luxury item and people wants to have luxury items ;). On the other hand, there won't be another operating system with a file system like WinFS in 2006, but there are already operating systems that look better than Windows and that are increasing their market share because of that.
From the developer/power user point of view, I'd better have WinFS, but I know I’m not in the target market for operating systems vendors.