I wonder if a court wouldn't void that part of the terms since it leans way too much in Apple's direction. Any lawyers on the board?
Hard to tell, on one side you have the it is Apple's store so they can control the content as they so chose, like a grocery store opting not to stock certain products, on the other hand I would presume there would be concern with the vague nature of the wording and a court could potentially find in favor of someone going against Apple can unreasonably block a Company or developer from releasing content and said Company/Developer has no other way to release their product to the community as a whole.
Away from the App Store, I am trying to think of another example of this. If Albertsons doesn't want to stock your product then you can go to Safeway, Kroeger etc. If you want to sell a part for a car, the manufacturer can refuse to sell it as they have their own parts but you can go through NAPA etc etc for aftermarket parts.
In addition to this, you aren't able to provide your product to iPhone/Touch users any other way than through the App Store, ie a standalone download from your own website, IIRC there is a way you can do a limited install but that is designed with the corporate customers in mind and installing custom inhouse apps for the iPhone and I think it was like a few hundred installs max or something.
This is where it gets tricky, will the court rule in favor of Apple having complete control over installation of applications on your device or does the customer have control? Keeping in mind the iPhone and Touch are closer to actual computers than they are basic phones.
I wonder who will be the first group to try and get apps installed via a web site and circumvent the App Store. Something like that could really hurt Apple, setup a counter site, offer the hosting, and more money goes to the developer.
Speaking off... the $5 price keep in mind Apple gets about $1.30 of that and the developer is really only seeing $3.50 due to apple taking 30%.
Was interesting to hear everyone's views on what I said - I'm always open to other opinions and views and I'd retract my statement.
Hopefully we didn't torch you too much

Will give you a free pass and say it was early and you didnt have enough coffee to get the mind in high gear. And you don't need to fully retract we all place different monetary values on what an application can do.