Because Flash is open source to some extent, it is vulnerable to hacking and other security threats. If the iPhone were to have Flash support in its current form, the User's account information, iTunes transactional processes and other vulnerable information is at risk. A solution is underway, but the core issue is security related as I understand it. In order to close the security gap that Flash support would expose, a new, more robust and closed version of Flash is required. I think that Adobe and Apple are at odds over who should pay for this added development cost and implementation.
Flash is also largely blind to search engine optimization. When you jailbreak your iPhone, you also open a huge door to security threats. This is the situation as I understand it.
Closed source does not equate to increased security. In fact in many cases, a properly maintained package of software, reaps rewards of increased security through open source, because you have more eyes evaluating the source to spot vulnerabilities and patch them. Security through obscurity is not good security.
Also flash is not open source.