Its a cool flash iPod with a pretty screen, a great ui, but its an iPod first.
Yeah, see, I think you hit the nail on the head right there. Ultimately, it's an iPod with telecommunication functionality, but it's primarily an iPod. I can see Apple not wanting to implement Flash for a myriad of reasons - their whole love/hate relationship with Adobe being only part of it (and it is love/hate - the two companies rely on one another because they have to - they are the defacto standards in the design world - Apple hardware with Adobe software, but there is a ton of bad blood going back decades between the two companies and employees). As far as AT&T being responsible for the limitations - I don't work in telecomm, so I won't go as far as RnSK in defending AT&T's tactics (especially since we aren't even totally talking about AT&T AT&T right now - we're talking about the mobile arm of SBC, which is now branded as AT&T, which is a little different than the industrial arm of AT&T that has been largely responsible for every major telecommunications innovation in the last bajillion years...all the ownership changes and branding changes make it really hard to separate, especially since all the companies are essentially under one big umbrella, but the mobile phone company is not the same as the engineering arm) -- but I don't think the lack of flash support has anything to do with AT&T the cellular companies fears of a VOIP app on the phone. It's not like they couldn't support flash elements for web pages/video and disable network VOIP at the same time. My guess would be Apple doesn't want to pay the money that would be required to get a Flash OEM license - they would rather have companies like Google (YouTube) start using h.264 because then they still live in a fantasy world where QuickTime can become the standard for web video/digital video. They are already getting YouTube to switch to h.264 for AppleTV, if they can try to make it the new YouTube standard (which as someone else noted - even if that happens, legacy flash support won't disappear and flash video on other services is NOT going anywhere - flash video was the biggest internet innovation in years...and Apple trying to change the standard won't turn the clock back), then why pay the money per device to license an Adobe SDK?
The problem is that in marketing this phone as "full internet" and basically a device that will double as a miniPC as well as a cell phone, and charging $600 plus 2-year contract, consumers are going to balk at limitations that make those promises nothing more than PR spin. A big reason so many people have been excited about iPhone is because of how frustrating mobile web devices have been up until now -- you can do a lot - but you are also really limited. If Apple's "answer" is to continue those limitations by taking away a core part of web standards functionality (and that would be flash support), well, people are going to be pissed off.
Personally, I think the problem has always been that this phone has always had a decidedly consumer focus, yet it has been sold (though not entirely) and interpreted (that's been the real problem - the media interpretation) as a prosumer device that can be easily integrated into business environments. Regular consumers might not care about any of the limitations when it comes to how well it can display flash, if it supports java for 3rd party apps, etc. -- of course, regular consumers are also going to be reticent to spend $600 on a phone, while also spending close to $100 a month for the data/voice plan - and being locked into a two year contract (seeing as most regular consumers only do the contract to get the phone for free or at a huge discount). Prosumers, the people who don't balk as much at $600, and who are already paying that much for a phone/data plan - will balk at not having the promised set of features.
I don't know...ultimately, this may not matter for this phone's actual desired audience, people who will be ecstatic to have an iPod and phone in one, but who won't care so much about serious internet access -- for the slew of professionals (and it won't be just design professionals who will be put off by lack of flash support) who were looking for this to be the next mobile innovation, a la RIM -- not having flash support is going to be a big disappointment. I have and will continue to view this as a phone similar to the SideKick 2, in terms of scope and aimed user base. This is not the next Blackberry or even the next Razr (and I mean that in terms of mass-scale adoption, not feature set).