>I can't imagine that Apple would let anything through that weakens the iTunes/iOS death grip on media playing.
The iPad does video so well because it uses hardware support. From the "hardware limitation" comment, I suspect VLC isn't able to take advantage of this. Given that, I don't think it could weaken the iTunes/iOS "death grip" even if it were accepted.
But if they aren't using hardware acceleration then I suspect it wont get approved. Would you want a player that everyone is going to be downloading (so they can watch any video) out there making people think your device is slow and underpowered? I wouldn't.
EDIT: Nevermind my last paragraph. There is apparently already players in the store that don't use acceleration.