An iPad news reader app designed by two college students has taken more than a few breaths away. Developed as part of a class at Stanford University’s Institute of Design, Pulse is everything you’d want out of an iPad news reader: it has both form and function.

The user experience is obviously a big reason why the app, which sells for $3.99, quickly became the top-selling iPad app in the App Store. And it’s a big reason why Steve Jobs, who was reportedly disappointed with the New York Times’ own iPad app, personally highlighted Pulse this week.

But Pulse’s flurry of sales will come to a complete halt if the New York Times has its way. According to the Times’ lawyers, Pulse’s twenty-something creators are cashing in by making use of Times’ RSS feeds, which the Times explicitly limits to non-commercial use in its terms of service. Pulse, by default, suggests the New York Times feed, which it cleans it up and also frames. The Times layers also note that the New York Times feed is prominently displayed in the screenshot of the app in the App Store.

Yesterday, Pulse was removed from the App Store when the New York Times complained to Apple, but it later resurfaced. As of this moment, it’s unclear what is taking place behind the scenes, although is reporting that Pulse’s creators plan to simply remove the New York Times from the app.

Obviously, there’s an argument to be made that Pulse is no different than any other news reader. The New York Times feed might be suggested, but at the end of the day, Pulse users can select which feeds they want to pull. From this perspective, one might suggest that Pulse buyers are paying for the user experience, not the content.

On the other hand, it’s pretty obvious that Pulse was designed to provide easy consumption of content owned by publishers like the New York Times, and by including the New York Times by default, it would seem that the Times’ lawyers do have a point about the terms of service violation. After all, the New York Times is most certainly being used to sell Pulse as an app, even though it’s not being compensated for it.

Unfortunately, as in most situations like this, there may not be any winners. It’s disappointing that the New York Times apparently chose to force Apple to pull the plug on Pulse before trying to find a more amicable solution, but at the same time, it’s naive to believe that just because somebody builds something really cool, copyright and terms of service should be ignored.

The ideal solution, of course, is for publishers like the New York Times to find a way to work with clever, talented people like the two students behind Pulse. That’s certainly not always going to be easy, but when reasonable minds prevail, it can be done. Case in point: CNN found a good way to deal with the owner of the massively popular (and once-unofficial) CNNbrk Twitter account.

Bottom line: as the New York Times prepares to close off its content behind a pay wall, it shouldn’t close its mind to the idea that individuals outside of the company just might be able to help save it.