As a developer who has been working on game development for iOs for both the iPad and iPhone 4 platform, I thought I'd chip in with my two cents - sorry if some of this probably makes sense only to people on the developer side, but to me it seems that the question of the increased resolution is very clear in the sense that it's not going to happen right now, for several reasons:
First off, my current impression is that hardware-wise, the iPad's 1024x768 screen already feels somewhat at the limit when it comes to the issue of pixel-pushing power from the GPU. The iPad is actually pretty fillrate-limited - you could increase polygon count pretty significantly before running into performance problems, but the raw pixel fill rate is already relatively at its limit.
What I can see is that I only get about a 2x overdraw (meaning the amount of pixels that get drawn but then overdrawn with something in front of it) on the iPad before the framerate takes a dive whereas I could easily get a 5x overdraw on the 3GS.
I've seen a lot of developers complain about the limited fillrate of the iPad and the general sense is that the resolution is already a bit too high for the hardware powering it, but you can make it work reasonably with a couple of optimisations.
Additionally, comparing performance on the iPod touch 4G and iPad essentially lets me single out the performance difference in resolution between 960x640 and 1024x768, as the other main specs (A4, PowerVR SGX 535 and 256MB RAM) are pretty much the same, with the iPod touch having to push about 78% as many pixels as the iPad; so if the raw pixel number was indeed the limiting factor, I'd expect a performance increase of about 1/0.78 or 28% - what I'm seeing, however, is a performance increase that often exceeds that, especially in situations with a high overdraw. This to me indicates that the current hardware platform (as in A4 with a 535) is well at its limit with 1024x768 and won't be able to go any higher without a change in architecture. No doubt about it, Apple obviously did a great job in getting the maximum power from the hardware that we have, but to go any higher you'd need to pretty much change the whole underlying setup:
Now the 535 certainly isn't top of the line when it comes to mobile GPUs, and I've often heard that nVidia's Tegra 2 for instance would offer a performance boost in the region of 2x - 2.5x (although I'm not sure how much of that would be fillrate-based or if that number refers to the number of polys drawn). That's not to imply that Apple would go with nVidia for the iPad 2 (in fact, I'm pretty certain that they won't), but just as an example of what's possible.
What we haven't thought about here yet, however, is the question of what a different graphics chip would do to the battery life - it's unlikely that a more powerful chip wouldn't cause significant battery drain, and my feeling is that the 10 hour battery life of the iPad is considered one of its primary features and selling points by Apple and they'd be very careful to jeopardize that.
Now, the critical question is what resolution we'd be shooting for with a higher res display:
Keeping with the 4:3 ration (and I very much doubt that they'd change that), the first possibility comes at 1280x960, as has been suggested multiple times in this thread. Now that's a 25% increase in every dimension, so overall yields about 56% more pixels than 1024x768, and has the advantage that 720p video could be played back in the displays native resolution, albeit letterboxed.
However, a pixel number increase of more than 50% will definitely require at least a different GPU, and it will massively increase fragmentation on the iOS platform - right now, I already have to worry about making everything work at both 960x640 and 1024x768, add in another resolution and things just get worse. Of course, you could just scale up existing apps (I have now idea why people on this thread seem to think that you can only scale up old apps if the new resolution is an integer multiple of the old resolution - you could of course just scale everything up by 25%, how do you guys think video playback works fullscreen for a multitude of different resolutions?)
The question is whether it would really be worth it for Apple to have to massively change the underlying hardware, possibly jeopardizing battery
life and increase the fragmentation (what will that look like on the app store? Will we have a regular iPhone version, an HD version for the iPad 1 and a "super HD/HD HD/real HD/true HD" (or whatever) version for the iPad 2?) for something as minor as an upgrade from 1024x768 to 1280x960? I sincerely doubt it, as that would hardly qualify as an additional selling argument but cause a whole lot of problems.
Display resolution isn't a hardware spec that can easily be graduallly increased (like RAM or processing power) - if you're changing the resolution, everything will have to be rewritten to take advantage or it just won't look any better, in which case you could just have stuck with the old one in the first place.
Of course, Apple could decide to go all-in and actually significantly boost the resolution so it can slap a "retina display" label on the iPad 2 . Just for the sake of argument, let's say Apple does decide to go for that and boosts the resolution by a factor of roughly 2.5x up to 1600x1200 (and that's just the very lower end of what could conceivably be called "retina", doubling the resolution both horizontally and vertically to 2048x1536 would increase the number of pixels by a factor of 4, so the following argument applies even more strongly):
I don't think most people on here realize what an incredible challenge that would pose in just about every conceivably way:
As far as I know (I'm no expert on display technology, so most of this is second hand information; I'd appreciate it if someone with actual expertise on this area could tell me if this is correct), a 10-inch display with that kind of resolution is still the domain of medical imaging and other specialized (aka non-consumer) fields and hence incredibly pricy. Furthermore, developing such a screen that is not only affordable (and remember, we're talking about a consumer product with a $500 price tag) but at the same time also energy-efficient would be an amazing feat and something not expected at least for the next 3-4 years. It's not as simple as just putting four iPhone displays together side-by-side - as the physical size increases, keeping the pixel density becomes exponentially more expensive and power-intensive.
Even if Apple somehow miraculously manages to pull this off and come up with such a screen, the real problem that needs to be tackled is the underlying hardware that's going to push the pixels to that screen. Now we'd need a new architecture with at least three times the pixel pushing power for the raw fill rate, so again Apple would have to come up with a new CPU/GPU combination that triples current performance - all the while also not significantly consuming more power. Of course, you could argue that we don't need additional CPU power and perhaps doubling the fill rate could be enough - but in that case, what's the point in pulling of all these technical miracles if you can't show off much higher poly rates and higher resolution textures? (If you don't believe me, try running a N64 game in an emulator at HD resolution and you'll see that just upping the resolution doesn't help, and in fact sometimes even hurts, when you're not simultaneously upping polygon count and texture resolution).
So with a new GPU/CPU thus has to come more RAM - roughly speaking, I'd guess that you would want at least 4x as much RAM, so that puts us at 1GB. That actually seems feasible, so that part wouldn't be the biggest problem.
However, if all the textures, videos, etc. are 4x as big, they're going to need at lot more storage space (again, yes you could compress a 2048x2048 texture down to the same file size as a 1024x1024 texture, but then you'd be forfeiting the gains from the higher resolution).
Now Infinity Blade for instance already clocks in at over 300MB, so that would be boosted to over 1.2GB for an app, and once you get larger amounts of video in there, you'd need a bluray disc or prepare for really long download times.
Now I realize that all of these issues concerning new GPU, more RAM, increased app size, etc. would be fixable in different ways, but remember that these are only the issues that come up after Apple has managed to build a display unlike anything on the market for only a fraction of the current costs of high-end displays and simultaneously boost the raw power of the iPad by a factor of more than 3.
If you look at Moore's law (which is still pretty valid these days), tripling (or even just doubling) performance in about 12 months would be pretty spectacular in its own right, and it's simply not what Apple does - it took over three years to go from iPhone to iPhone 4, and that step was arguably smaller than the step from an iPad to the hypothetical "retina iPad 2" would be.
My final argument is that even if I grossly underestimate Apple's engineers and they did manage to solve all of these problems in just about a year, why would Apple want to blow this great innovation right now?
The iPad is strongly in control of the tablet market for a number of reasons (mostly ease of use, wide ranging availability of apps and content as well as really strong battery life), and a higher display resolution does not add anything to the iPads core selling points, but might in fact potentially damage some of them (lower battery life, less ease of use due to higher fragmentation of the iOs platform, etc.).
It's much likelier that the iPad 2 will be a minor upgrade that adds the features that might have intentionally been left out of the original iPad (camera, gyroscope, more RAM, more storage space, etc.), but it will certainly be much more of an evolution than a revolution.
Eventually, I'm sure that Apple will go down the path towards a higher resolution display, but without any apparent really strong threats to the iPads position in the tablet market, they are certainly not going there right now.
Wow, that was longer than I'd expected, but I hope that looking at things from the developer's perspective adds something to this discussion.
In fact, I'd be willing to bet a good amount of money on the fact that the iPad 2 will NOT feature anything that can even remotely be called retina (say, at least 1600x1200) - anyone here willing to take the other side of that bet?