More precisely, the chip in question should be a dual-core SGX543 GPU from Imagination Technologies. The rumor goes hand in hand with another rumor that claims the iPad 2 will have a much higher resolution screen than its predecessor, although the jury is still out on the exact number of pixels it’ll have.
The SGX543 graphics chip will most probably be paired up with a dual-core ARM Cortex-A9 CPU, which should make the iPad 2 a very powerful machine, more than capable of playing HD video.
It's important to note that the core specifications of a chip are not always directly proportional to its actual performance, and that what Apple does in software is often just as important than the hardware itself.
Nvidia's original Tegra chip was expected to blow the iPod touch out of the water when it appeared in Microsoft's Zune HD and subsequently the KIN, but that didn't happen.
On the other hand, over-exuberant reports also accompanied the A4. Last year, a report made prior to the A4's introduction, by the "Bright Side of News" blog, imagined that it might include a Cortex-A9 MPCore and an ARM-designed Mali 50-series GPU core. Jon Stokes of Ars Technica correctly described the A4 as being a single Cortex-A8 CPU and a PowerVR SGX GPU.
However, Stokes also added that it "isn't anything to write home about," and predicted that the A4 would skip on power by omitting camera processing features, making it unsuitable for use in a smartphone.
Another report, appearing in The New York Times last February, stated that Apple, Nvidia and Qualcomm were all working to develop their own ARM-based chips before noting that "it can cost these companies about $1 billion to create a smartphone chip from scratch." Developing an SoC based on licensed ARM designs is not "creating a chip from scratch," and does not cost $1 billion, but the article set off a flurry of reports that said Apple has spent $1 billion on the A4.