iPad 2 Display — Daring Fireball
Its display may be improved in other ways — brighter, better power consumption, thinner, perhaps.
The first improvement I'd make to the iPad display would be to make it able to go less bright.
Second on my list would be amount of ambient light reflected at the back of the display. I want this high so it's comfortable to see the screen outside. (I'm not talking about reflections on the surface — they're bad.) The iPhone 3G does a wonderful job at this: it's easy to read when holding the phone in direct sunlight. It's even better than the iPhone 4’s screen in this regard.
My next improvement is somewhat fuzzy. Basically, text on the iPad doesn't look very good while scrolling compared to the iPhone. I'm not quite sure what causes this.
Another factor that's less obvious, but John Gruber touches on, is the weight of the display and the glass. (Marco Arment has discussed this.) When I think of engineering at Apple, I usually think of software and electrical engineering, but materials science is also crucial. Better glass (higher specific strength, or maybe stiffness) could result in a lighter panel, which would make an enormous difference to the iPad.
After these are sorted, then we can think about pixel density.