Skyfire is a browser on other mobile platforms that was at one point purely proxy-based like Opera Mini (where everything was pre-rendered on a server then pushed out to the device via compressed files) but is now an all-grown up WebKit engine where Flash content is still proxied (processed server side and sent out as iOS friendly video).
They're submitting it to the App Store -- we know because, also like Opera, they announced their intent to submit -- for iPhone and some concerned internet denizens are wondering whether or not it will get accepted, and what if anything it may mean about Apple's current stance on Flash.
Short answer: nothing.
Long answer: Skyfire for iPhone would use the built-in WebKit viewer any app could use, and would probably proxy Flash the same way Microsoft claimed they worked with Apple to serve Silverlight. That means you'll have a way to watch video, but probably not interact with punch-the-monkey adds. Win.
Why is it an apparent issue then? Because Skyfire posted about submitting it, because Apple conspiracy theorists love to conspire about theories concerning Apple, and because the App Store approval process remains utterly opaque and at times seemingly arbitrary.
Hopefully Skyfire gets approved and works well. My guess is it will get approved partly because it won't work well -- on-the-fly transcoding Flash to H.264 is a daunting task for developers (getting Flash to run native on Android is still hit and miss), and will be an exercise in patience and perseverance for users accustomed to things that just work.