The OP could have said nothing at all. If the fellow isn't buying an iPad at all, then it doesn't matter if he doesn't fully understand it. If he is buying an iPad 2, then it doesn't matter if he doesn't understand the iPad 1.
If nothing is said by the OP, the fellow keeps his dignity. He has a pleasant time showing off to his wife (who may already know what the iPad 1 does and does not do). He comes back some other time and buys something from the store where he had the pleasant time.
We all have things that we "know", that are wrong.
If the fellow wanted to buy an iPad 1, then the OP could have upsold him to an iPad 2 by talking about how the 2 does both video and photos. Which is not technically misleading, if you never mention what the iPad 1 does/does not do.
So letting the guy believe he had something he did not, instead of possibly giving him the info he needed to go back and confront the person who screwed him would be better? Or using the fact the guy got screwed already as an avenue to take more of his money on an iPad 2 would have been better? But attempting to help the guy by correcting his misinformation, THAT'S unacceptable?
Riiiiiiiiiiiight.....
I don't think the OP either set out to hurt the guy's pride, nor frankly, was he responsible for protecting it either. He tried to help the guy and it just didn't work out the way he expected. Everybody needs to stop inserting their own personal sensitivities and context into what the OP actually said.