This is particularly welcome, because when I interviewed Ian for the Web Standards Project two years ago, I asked him what his favourite feature that will get bumped from HTML5 to HTMLnext, and he replied
In-window modal dialogs or dialog box—the kind of prompt you get when the computer asks you a question and won’t let you do anything else until you answer the question. For instance, the window that comes up when you say "Save As…" is usually a modal dialog.
Right now people fake it with divs and complicated styles and script. It would be neat to just be able to say "make this section a modal dialog". Like showModalDialog(), but within the page instead of opening a new window with a new page.
I’d add it to HTML 5, but there are so many new features already that we need to wait for the browsers to catch up.
I'm sure a lot of things got cut as the working group had to focus on certain topics at the expense of others. I do know the group working on the HTML5 specification is a small and very hard working group of people. If you feel passionate about a topic, pitch in to help! They are collecting use cases and working on ideas for this at the WHATWG: http://wiki.whatwg.org/wiki/Dialogs