Having VLC available on the iPad would be hugely beneficial. VLC plays far more video formats than QuickTime or the iPad's built-in video support; on the Mac, I've often said that if VLC can't play it, it can't be played. We don't know yet if VLC on the iPad will allow you to move (for instance) AVI files straight into the VLC program via iTunes or if you'll be required to stream files from a Mac to view them on the iPad. In either case, VLC's ability to play almost any video codec out there would vastly expand the iPad's capabilities.
That said, there are multiple reasons why Apple might reject this app. "Duplicating functionality" is one possible reason; the iPad already has a built-in video player, though one that's far more restrictive in the formats that it supports. There may be severe battery life issues to contend with as well. The iPad has the ability to decode H.264 video via its built-in hardware, but most other formats would have to be decoded via software, and depending on the format, it could tax the iPad's A4 processor pretty heavily. Finally, it's possible that media providers might squawk in protest at the iPad being able to easily and freely play video from any source -- let's just say that a lot of the AVI files and almost all of the VIDEO_TS folders out there aren't exactly condoned by the media conglomerates and leave it at that.
I hope this app does get approved. I don't own an iPad, but being able to play back virtually any type of video file on the device via VLC would be a huge selling point for me, and probably for many others, too.