Design for Large iPad Screens or Small?

iPad 2 and earlier: 768x1024

iPad 3+: 1536x2048

If we design our sprites for the iPad3, does that mean they will automatically look terrible on an iPad2?

Or should we focus on the common denominator instead? (iPad2)

Design for iPad 2, resolution might be different but quality would look the same for ipad 3 and 2 if designed for ipad 2.

Both.

Make your graphics as large as they will ever need to be, and use scale mode or letterbox scale mode.

You can take two approaches:

1) Disable retina display in project properties, which will make the iPad 3 act as if it has iPad 2 resolution.

2) Enable retina display, draw everything at high-resolution for retina, then use scale mode to resize down for iPad 2. I'd recommend this option since it will look better on iPad 3+.

Is this correct?

By Scale Option, do you mean Fullscreen in Browser: Scale (Highlighted Below)

<img src="http://i50.tinypic.com/s0v9e8.png" border="0" />

Taurian - yep, that's the one!