Resume padding

In relation to this thread I've got a question. If there are any HR people out there or people that do a bit more hiring than I do.
In light of the fact that so many people are 'padding' their resumes to make themselves look better, how can people that do not do it compete if they can't even get a foot in the door with an interview because their resume is weak in comparison?
My thought on it would be to mention it in your cover letter to let the reader know that they should consider your resume at face value because it is not inflated in any way. On the other hand that might give the reader the impression that you think everyone else is a liar.
The hiring I used to do was for customer service so I didn't really have to deal with these issues. Do people involved in hiring mentally subtract from resumes that they receive, or do they pad the job requirements that they post to compensate for the padded resumes?
I would feel very cheated if I was not called for an interview because some liar felt he needed to cheat to look better than everyone else. But on the other hand, I'd hate to make it sound like I'm a cry-baby on my cover letter.

I've done quite a bit of hiring. I never saw any with "10 years Java experience." I think I did catch one or two outright lies during the interview and ended them soon after. As for the other resumes, who knows. They could've padded their resume by a year or two. I check references but not necessarily ever job listed on their resume. However, it's easy to tell the competant people from those who are not. The competant people have less reason to lie.
I would simply ignore the issue in your cover level and let your merits stand as is.
--Mark
PS I take lying very seriously. I did once kick out a pledge in my fraternity the day before initiation, because we caught him lying. He wasn't the greatest pledge to begin with, but we would've accepted him (a bad pledge does not necessarily mean a bad brother), but lying was just too much.

Thanks Mark, I didn't think it would sound right putting something in my cover letter but I just wanted to bounce it off of someone else too.