Will voice dictation work on iPad 2?

No. I installed iOS 5.1 on a Wifi iPad 2, and opened the notes app. No microphone icon is displayed on the keyboard as shown in the keynote or as one sees on the iPhone 4S. This means that voice dictation is a iPad (3rd Generation) and iPhone 4S only feature. There may be apps that enable something like this in the App Store.

I can't guess about the lower priced iPad 2 16 GB, but existing iPads do not seem to get this feature with the iOS 5.1 update.

It's too bad Apple decided not to include this technology in the iPad 2. I'm dictating this response on Dragon and works just fine. The iPad 2 has ample horsepower to support dictation.

It's unfortunate that many perceive the dictation function was excluded for obvious marketing reasons, but the iPhone 4S features advanced noise cancelling and voice clarification hardware not present in the iPad 2.