At this point things are locked in. The iPad 2 will arrive with whatever specs Apple has given it.
As far as speculation goes...
As many have pointed out above, the iPad will eventually get a double resolution display. Intermediate resolutions present a lot of problems. If Apple waits till next year then it will be a me too thing. If they do it this year they will crush the competition. It will give Apple at least one more year with the field to themselves in order to establish the iPad as the de facto standard. You have to think that they have looked at this carefully, whether they chose to do it now or not.
The iPhone 4 has an IPS display with a much higher PPI than that proposed for the iPad 2 so the technology for making displays of this resolution is clearly available.
Larger IPS displays with comparable resolution are on the market.
HP ZR30W 30" 2560x1600 street price about $1,100
HP ZR24W 24" 1920x1200 street price about $400
Clearly a 10" display would cost a lot less than $400. Maybe $200? And that is a retail price. The buy in cost for just the panel itself would be much less. Now consider that these HP displays are sold in low volume to niche markets and that Apple will be buying these in the millions and you have to think that a price low enough for an iPad is plausible.
I can easily see Apple selling the current iPad at a lower price and then selling iPad 2 with this great display for >$500. Keeping a model with the current display would be a hedge in case of problems with the high rez display.
Apple is often conservative in some product specs, but at other times it has pushed the envelope. The first iMac dropped the floppy disk and added USB ports. When the DVD burner was introduced to the PowerMac it was pretty amazing. When the Cinema Display was first introduced it was an amazing bit of technology. The unibody MBP and the MBA are aggressive designs. It is not unprecedented for Apple to make a bold move. The unibody MBP, the battery for the MBP and the MBA all required investing in custom tooling in advance of the launch as would this display.
Having said all that I wish Apple would knock this rumor down quickly if it is wrong. I hate talking myself into something like this only to be disappointed on launch day.
