"HTML doesn't support multi-touch, iPhone runs on it...hence, iPhone should not support HTML"...?
All multi-touch does in Safari is zoom! Flash could support the very same functionality. I think you're focusing on the limitations of the technology instead of focusing on the limitations inherent to the iPhone today.
My reasoning goes something like this: the Internet contains information that I want to access. Often, that information is embedded in Flash widgets, Flex RIAs, iPapers, etc. As an end-user, I could care less that the information, the video, the whatever is in Flash, HTML, or sign language - I just want to be able to see it. Continuing with my previous example: I don't care that I can't use two fingers to control stormpulse, my only requirement is that I can access the existing information! I want to be able to see the content in the links my friends send me, to see the videos embedded in the pages I'm looking at. That alone should be a large enough requirement to make Flash on the iPhone useful. You can argue for days about the best technology to build something in, but the fact is that when I can't see a video I want to see on the iPhone, I'm frustrated.