How does it deal with the problem that alot of flash content, especially games, you hoover your mouse pointer over areas to reveal things, and then click? With a purely touch interface that wouldn't work.
The mouse and key emulation problems are not unique to Flash.
The same situations occur with HTML pages.
They are universal problems that come with providing only touch input.
There are many HTML/CSS websites that use hover menus, and mouse events, which touch browsers cannot easily implement. There are web games that want key input. So the browsers have to provide alternative control methods.
Take mobile Safari as an example. The usual mousemove event isn't available since dragging = scrolling in the iPhone paradigm. Hover events also aren't available because it doesn't have a click-touchscreen like the BB Storm.
Mobile Safari tries to solve the hover problem by making the first click a hover and the second do the menu. Scrolling within textareas/divs is done by using two-finger drags.
As for key input, that used to be fairly easy when every phone had a cursor-pad. Now we can't even count on that. And phones are even dropping extra menu buttons that could be used. So key input is still a problem on every type of app (native, web or Flash) unless you own a phone with a physical keyboard.
Again, these are problems that must be solved for native, web or Flash apps when run on touch-only devices. They are not problems specific to Flash.