John Gruber has a thoughtful explanation as to why the iPad 2 won’t have a double the resolution “retina” display. He goes on further to discuss why the iPad 2 will likely be an incremental update:
Consider the timeline for the iPhone (and iPod Touch): three model years at the original resolution (iPhone, iPhone 3G, iPhone 3GS). Then came the iPhone 4 with the retina display. From what I’ve gathered about the iPad 2, it’s more analogous to the iPhone 3GS than the 3G. Spec-wise, the iPhone 3G differed from the original iPhone in only one significant way: the 3G networking support. The iPad 2 is more like the 3GS: faster processor, more RAM, better graphics performance — but, like the 3GS, still with the same display resolution as the original model.
Gruber has inside sources and tends be correct on these things.