I’m inclined to think Apple will phase it out. Assuming that the cost of production is largely the same, there isn’t a lot of wiggle room on the price. By observing the cost of early Android tablets, we can conclude that the existing iPad price is very aggressive, leaving little room for a drop even a year on.
As for the next-generation iPad, I suspect this upgrade will be modest, leaving Apple to concentrate on a slick case re-design for 2012. Apple will probably keep the visuals the same so that those who bought in the second half of 2010 feel less aggrieved. 2 Let engineering iterate for a year while working on something much bigger for the next year.
The screen size will probably stay the same. DigiTimes, whose track record is respectable, has reportedly identified the backlight unit manufacturer for the next-generation iPad. If that’s true, you can forget an OLED display on the iPad 2. I do believe there will be a modest jump in resolution, possibly to 1440 x 900 or 1600 x 1200. But forget a retina display, as an iPad with a pixel density of 326 PPI would require a screen resolution at or around 2560 x 1920 — nearly 5,000,000 pixels. Just powering such a thing would be all but impossible.
The CPU will also get a modest bump, the RAM will be increased and a front-facing camera will be added (that’s pretty much a given). Add a bit more battery life and I suspect that’s it. In short, I think the transition from the original iPad to its successor will mimic the transition from the iPhone 3G to the 3GS, rather than the 2G to the 3G or the 3GS to the iPhone 4.