A player on a German forum reports word from Valve that Friendly Fire was never meant to be in Team Fortress 2, and the option will be removed shortly. Wait, don't go! We have better evidence than that.
Okay, so the source is not ideal, and the Google translated post ends with "TF2 was thus never meant that one plays it with Friendly Fire and the instruction becomes shortly rausgenommen". But we bet our furry World in Conflict hat that the quote is accurate, and the statement true. Valve have always told us Friendly Fire is intended to be permanently off, and when last we heard the plan was not to even include it as an option.
But it is an option, in the beta - there's a 'cvar' command for toggling it when setting up a dedicated server. Many admins use it, since serious clan games of previous Team Fortress games were usually played with Friendly Fire on. It made the otherwise under-powered Spy class a viable option, since players couldn't afford to shoot their team-mates all the time to check they weren't enemies in disguise.
TF2 doesn't have that problem, though - the Spy is plenty powerful with Friendly Fire off, since he can now cloak completely and doesn't even bleed when taking non-lethal damage from enemies. He's perfectly balanced without Friendly Fire, and wildly overpowered with it. Similarly, the Pyro is hopeless when his extravagant flames can torch his friends as easily as his foes.
In principle we're all for player choice, but in this case the option damn near breaks the game. Leaving it in suggests to players that it's a viable way to play, and leaves many servers running a hideously imbalanced and unfun travesty of the real Team Fortress 2 experience.
The post also quotes a Valve staffer, on finding himself on a Friendly Fire server: "Every time someone starts a server with FF on, an angel cries."