As a few others have said, Adobe claims this is not the case. they have stated that it compiles it into a fully-compliant (uses all the proper APIs), fully-native iPhone OS application.
Almost nothing (aside from research projects, really) does this. Machine-converting one source language into another very different language is very difficult to achieve correctly, and is unnecessary when you can simply compile the original code, achieving an often-better result with less steps.
This is a petty shot at Adobe just before their CS5 release -- nothing less. Apple's getting too sure of themselves, and are going to end up doing something absurdly stupid, in the name of control, if they haven't already.
Edit: By the way, for those criticising Flash applications as 'terrible', this is an example of one built with the pre-release CS5:
Canabalt, playable online
at Newgrounds, with the Flash browser plugin. So far it has not been used for creating 'crap' (enough of that is created with Obj-C), but has been used for porting popular Flash games to the iPhone -- in some cases, at least, quite successfully.