Well, there is licensing. But Apple could have done that without too many problems. They don't usually have a lot of planning issues or red tape conflicts... they know what they're doing.
There's also the issue of CPU power and battery drain. However, now there is Flash Lite, which is made for mobile devices like Nokia phones, PDAs, and PSP game devices. I have no doubt that even with a small hit in battery marginally more than decoding video (or probably equal, really), the iPhone and iPod touch could use this technology.
The real issue here is if Apple wants that.
1. Flash really encourages people to make awful user interfaces, stupid games, and just really lame/lazy websites. Standard user interface ideas and UI motions coherent with those present in OS X for iPhone/iTouch would not be echoed in a Flash-based interface.
2. It's much better to be using standards, such as HTML/XHTML/CSS/JS/Ajax/etc, because instead of just one company developing them it's years and years of huge teams of intelligent people, and standards do not require a $1200 piece of software to be purchased from a single entity.
3. Flash has capabilities stronger in nature than Ajax stuff, which could theoretically mean that it would be much quicker, easier, and more interactive to build something like a VoIP solution via Flash, or like an iChat client, or non-iTunes streaming radio, or file browser, or automated installer, etc.. Though really it's plenty easy now, once you get the installer *onto* the iPhone/iTouch.
4. Which brings me to my final point... if Flash were present on the iPhone/iTouch, YouTube--the iPhone's biggest win in the web2.0 space and major free content provider--what incentive would they have had to convert their videos to the obviously more compatible, more efficient, more-in-line-with-Apple-and-Quicktime h.264 standard? I can't recall if they purchased a load of Xserves from Apple for this conversion, but that could factor into it as well.
I'm pretty much ambivalent, really... having been a web developer, I don't use Flash and I live happily without it. 93.7% of websites that use Flash annoy the crap out of me, and it seems to me to be a dying trend that Adobe is trying to breathe some life into so that they can keep their proprietary tech being a stream of cash money. I hope they fail, honestly.
I'd prefer Apple spend some time THINKING about what they did to customers by removing the ability to edit the calendar on the iPod touch and why they removed the Notes and Mail features!!!