More discussion with my player tonight....
He's got a good question. I've told him that, in 3rd edition, the term "flat-footed" does not refer to a state of complete unreadiness (as it is defined that way in 2nd edition), and "flat-footed" certainly does not refer to a state of complete readiness.
The term is used for a state somewhere in the middle, describing a state of "half-rediness". This I've taken from the various sources describing the flat-footed condition as not yet able to defend actively and such.
His reply is, "Fine. Then why don't the mechanics back up that state? If my character is surprised and completely unaware, he's flat-footed. If I am aware of my enemy, in this state of half-rediness by losing initiative--I'm still flat-footed."
He's equating being Surprised with losing nish.
I told him that, with surprise, being flat-footed is only half of it. You don't get an action at all.
With Surprise, you are flat-footed and don't get an action.
With Nish, you are just flat-footed (and still get to go later in the round if able).
But, he's disregarding that, thinking that the mechanical penalty to both Surprise and lost Initiative is the same: Flat-footed.