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Ok, I'm gonna lay out the obvious here for the sake of being concise.

The AppleTV 2 has A4 chip
The iPad 1 has A4 chip
The iPad 2 has A5 chip

The AppleTV can only output at 720p

The hdmi adaptor works with iPad 1 but only at 720p
The hdmi adator works for iPad 2 at 1080p

Therefore, AppleTV 3 will have A5 chip and be able to output at 1080p

It will be so powerful in fact I think some major improvements will come.

In the photo booth and iMovie apps the power of A5 really shined with all the simultaneous video playing and editing being done, and this could translate well to AppleTV 3 for many things..

If you read the specs on the HDMI adapter, while the iPad 2 can "output" 1080p, it can only do that while mirroring. When you play a movie, it will output at 720p.

And, mirroring is only available on iPad 2, not on the older devices.

So it looks like when plugged into older devices, it acts exactly the same as the VGA, composite, or component adapters. It outputs movies and photo slideshows while they are playing, and that's it. Hopefully the 720p limitation for movies on iPad 2 means that it plays them at full-screen, no goofy displaying only the aspect ratio of the iPad...

But as others have mentioned, even outputting at "1080p", when you're mirroring a 1024x768 screen, you're still only mirroring a 1024x768 image.

If you watch the iPad 2 videos, it even appears that there are 'pictureframe' borders around the mirrored image. So it appears that when you're in portrait mode, it likely outputs a pixel-perfect 768x1024 image onto that 1920x1080 screen, so not only do you lose nearly 2/3 of the width, but you lose 56 vertical pixels (whooptie-freakin'-doo...)

In landscape, you still only get 4x3 ratio, although it is obviously doing more than a 1:1 pixel map.
 
Oh great. Now I'm going to have to go back and re-rip my entire BD collection. Thanks Steve!

Even though I currently convert all my ripped Blu Rays to 720p, I still keep the original 1080p MKV files on an external drive for archiving/backup purposes. I was dead set against storing 1080p files in iTunes for my Apple TV because it meant I would also have to store a second copy in iTunes for my iPhone and iPad because even if they can play them, 1080p files take up far too much space to be feasible for limited capacity mobile devices. And it would have meant having both a 720p and 1080p version because I still wanted the ability to do Airplay in HD.

But now that iOS 4.3 has enabled Home Sharing for streaming from iTunes directly to iOS devices that changes the game up completely. I probably won't be storing videos on my iOS devices in the future anymore so the size of the files don't matter. I'm sure the iPhone 5 will have the A5 processor and support 1080p just like the new iPad.

So I'm looking forward to 1080p now. :D
 
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