Some great posts made by both sides here.
Brian, I thought you were blatantly honest and to the point; that's refreshing. I also thought you explained everything very well and professionally. (Okay the one little dig at Squirt, not so professional, but I understand there's a history there.) I also like that you are not simply drawing a line and cutting off anyone below that line; you're putting more thought and review into it.

We've been discussing this extensively on another board and I do have a question - what of the affiliates who sign up, never send a sale, but who send a number of referred affiliates and make referral $$ each month? Will they be cut because of their own lack of traffic, or will they be kept because they have sent you productive webmasters and are promoting you in that sense?

Folks, try to step back and look at this objectively. It might be that you're too close to the situation to pull the emotional aspect out of it. Sponsors doing this will make their programs better for all involved. Less competition, less saturation and watering-down... hell, less free porn dragging down signups.
More sponsors should do this. It would be better for the industry as a whole. (Actually they should be "closed" from the get-go and develop their own traffic sources, but that's another thread. Becky's post on the future of ARS and her focus on developing internal traffic was quite eye-opening. Could be we'll see ARS making a move like this sometime in the next year or two?)