Well it can output 1024x768 via the VGA dock connector. That's not exactly HD (1280x720), but it's close, and a much higher resolution than SD. The device can play back HD video on the screen, so decoding is not the issue.
Supposedly the device itself is capable of it but it's the output hardware (adapter) that is the limitation. If true, it won't be fixable only by software, but possible with new adapters. HDMI would be the most obvious way but Apple hates HDMI and will probably not produce or allow an HDMI adapter.