I'm not sure which is more appalling here, Apple's decision, or the large number of posts by Apple apologists justifying it. Yes, due to the way the contract is specified, Apple is not violating their terms by doing this, but that doesn't make it right. This kind of behavior will definitely hurt the iPhone app ecosystem unless there is some sort of pre-approval process.
I don't know how many of you actually operate in the business world, but there is a huge degree of trust required to do business--contracts exist to try to limit how one party can screw over another, but it is just not possible to nail down every case. This is why people like to do negotiations face to face, and reputations are important. You simply do not enter into a business agreement with a party you think is likely to try and screw you, no matter how bulletproof the contract appears to be.
In this case, Apple's contract is completely lopsided (Apple can do anything they want), so developers currently have to take it on faith that they will be treated fairly when they submit. Big developers such as E.A. of course won't have this problem, because they have leverage (approve our game or we'll pull all EA games from iPhone) and also sufficient capitalization where losing one product won't affect their cash flow, but small developers will be screwed.
This same sort of crap is prevalent in the history of console gaming, especially during periods where one console is in a dominant position, but at least when console makers reject game concepts, it's usually done before much development has occurred.
The iPhone development and distribution model is still a wonderful step towards freeing indy developers from risk-averse publishers, and giving them a real piece of the action. I just hope these types of situations remain the exception and not the rule. The very qualities that make Apple's products so great (arrogant self-confidence, ruthlessness in the design process, a willingness to make unpopular decisions, and holding products to a high internal bar) could make them a poor gatekeeper for a shared distribution channel.