(UPDATE: the iPhone uses a 3:2 aspect ratio which is not rectangular but not square. It is an Apple only format.)

The "Apple screwed the iPad up" camp scored another point when Tuaw pointed out that the screen on the device is 1024x768 and a 4:3 ratio.

This means that:

A) yes it does do high def movies...
B) it is 4:3 ratio.

if the numbers seem strange, and you don't see any issue, just remember when you first saw a widescreen DVD playing on a square tv, and remember those black bars because you will be seeing more and more of them.

Even YouTube content is going widescreen, so the Apple decision to use a 4:3 aspect is strange.
This is likely a limitation of the iPhone OS or possibly done so games and apps are always universally programmed form both the iPhone and iPad devices.