Apple has built a little slab of Disneyland with its iPad, which is meant to be an experience unsullied by provocative or crude material. It’s beautiful and enticing-- the company has already sold more than a half million of them in the first two weeks it’s been available-- but it’s not the real world.
Disneyland is the perfect metaphor for the iPhone/iPad experience. It's a closed theme-park, which exercises tight control over what products and services it offers its patrons. It's not an open market, and is not intended to be.
I'm hoping that once people get this, the moral outrage (and all of the articles about the moral outrage) will die down.
Applications that are in violation of the TOS are going to be rejected by the App Store. That means they have to be written in the language that Apple specifies, and meeting the content standards that Apple specifies. If there's content that in "Apple’s reasonable judgment may be found objectionable", you're out of luck.
And, of course, it's well within Apple's rights to keep the leash so tight, just as Disney can tightly control which goods and services are offered within the confines of their theme parks. It's not anywhere near a monopoly situation, and there are plenty of opportunities outside the park walls for developers to make and sell whatever they like.