your image original pixel size should be twice what it is displayed in the inspector(after you scale it to your liking).
anything higher IBA will down sample it to twice the size.
not a problem, but it doesn't make a difference to have it be larger.
so if your inspector shows image is 400pt wide(when you have it at the size you want)
and the original resolution is 1000pix wide, IBA will resample to 800pix wide
if the original image is 5000pix wide IBA will resample to 800pix wide.
If the original image is less then 800pix wide IBA does not resample it. (but you are also not taking advantage of the new ipads full resolution. May not make a big difference, will have to wait and see)
IBA will convert pngs(non transparent) and jpegs to jpgs with a medium/low setting compression.
so a JPEG with a "high" quality compression (small amount of compression) will be re-compressed to a medium/low quality.(more compression)
I don't remember if IBA 1.0 re-compressed jpgs. to a med/low quality.
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if your book had lots of PNGs, you will have a smaller file size with 1.1 due to conversion to jpgs
if it was mostly jpgs, you will have a lager file size with 1.1 due to resampling at 264dpi instead of 123dpi
it would be nice if you could choose the amount of compression of the JPGs. But I'm guessing on a retina display you would not be able to till the difference, or there would be little difference between a "high" quality compression and a "medium" compression.
As far as settings in photoshop, I would not down sample or recompress your images before placing in IBA.
keep your original images at their original settings.
I would let IBA do the resampling. just note that if it is less the 256 dpi it may not look as good, we will see.
and don't up sample to get the higher res.
If you have a monster file that is really huge, yeah, you could down sample in photoshop just to make it manageable.
Cropping yes, do in photoshop, IBA does not crop
and this can affect image quality, will explain later.
When we have a new ipad to test on we can see if having all your images at 256dpi is worth it.
My test were all based on looking at the files after exporting as a ibook.
(unzip .ibook file and look at assets)
FYI - IBA actually down samples to 144 dpi at a page size of 14.22 inches.
14.22" page size is the magic number to get Pages to import into IBA at the same size.