The problem is that Flash is everywhere. To release a product like the iPad, which is billed as the best way to view the Web, without Flash is disingenuous at best. Yes, Flash is used for ads and video, but it's also used for Rich Internet Application and games. Those are the real reasons that Flash is not allowed on iPhone OS -- people could use other apps without getting them through the App Store.
Steve needs to take a Valium or something and let Adobe release Flash via the app store. If users like it it will succeed. If not, it won't. Simple as that.
And while he's at it, Steve should finally get Blu-ray running on Mac OS. Without choices, people will eventually go elsewhere. It won't happen immediately, but over time it will.