Over at MacRumors (thread), I've been asked to compile a list of players that can vertically stretch a video so that it entirely fills the iPad's screen. During this, it does sacrifice the right aspect ratio and does distort the image. However, at least it doesn't cut off the sides.
Here's a 16:9 movie (my well-known resolution chart video available for download HERE) not filling in the (much taller) screen vertically in the built-in stock Videos app: