People supply many reasons to explain why Apple has not put Flash on iPhone, ranging from alleged arguments with Adobe to performance and battery difficulties.
While any or all of these reasons could be contributing factors, I believe that the most significant reason is more intrinsic: Flash on iPhone would suck.
Why would it suck? Because Flash, and its APIs, commands, and entire model of thought, are meant for the desktop, not for iPhone. And, as has been pointed out before, iPhone is not the desktop.
How would things like mouse-over, click, etc. occur? Okay, I can see using a finger tap for a click, but how would mouse over be accomplished? Worse still, how would the keyboard work? Although some Flash applications use Adobe widgets, even these are (I think) based upon the same keyDown/keyUp-style events. How will iPhone know when to show the keyboard? And, supposing that problem is worked out, how will it know what area should be focused on?
Assuming Flash applications are then limited to ones which require no keyboard movement and only minor mouse activity, we are still left with another problem: mice are precise, fingers are not. Many applications which use tiny buttons would be impossible to use.
This problem could, conceivably, be solved by using the pinch-zoom method. However, then drag-and-drop becomes impossible, as any drag operation would instead be understood as a scroll operation. Even without zooming or a need to scroll, drag-and-drop is complicated, because the only time that a mouseMove event could be fired in the first place is when the mouse is down.
Even YouTube would not work well in Flash on iPhone. You would have difficulty pressing the play/pause button, and using the track bar would be darn near impossible unless mouse-move was implemented.
While Flash does work on other phones, these phones still use the desktop paradigm: there is a fixed keyboard, and the stylus is very similar to the mouse. While the mouseMove/over difficulties would still be present, precision is not an issue, and there can be dedicated scroll bars on the side of the screen for scrolling (so zooming can occur, and Flash documents are not limited in size).
But, there is a reason why iPhone is so great: because it is not built traditionally, because it is not built like the desktop.
Flash is a desktop technology. iPhone is as far away from the desktop as you can get. That is why Flash on iPhone would suck.