Your comments

I use svn, though I guess I'm more excited about DropBox sync getting added (instead of the much less useful download/upload). I could do an SVN checkout from my computer into a DropBox area... And then sync to DropBox from iPad Textastic.
Option "2" is a good start, but for me to find Textastic useful, I'd really need option "1". ReaddleDocs does opton '1", and it really made difference between an App I love and use all the time, and an App that I find annoying and inconvenient.

I realize that handling conflicts might be difficult or risky, so... A simple answer might be to have it "check out" (ie, redownload) a file when you open it, and "commit" the file when you tap a "save" button (and also when you change which file you are editing?).

The only problem this leaves is... What to do when the user wants to work offline (ie, has no internet connection)? For simplicity, we might assume that if the user is editing the file, then he/she wants to use that copy of the file as the latest (even though we are offline and can't download).

Then when he/she connects, just overwrite - ignore any conflict resolution. Or, you could do a very simple conflict resolution, that just checks the iPad file minus the user's edit (diff) since the last connect. If they don't match, you could give a warning.

My point is that you can deal with conflicts in some simple way that does not require you to code a complex diff tool unix diff, TortoiseSVN, or WinMerge.

Or, you could just copy what another iPad app does for DropBox sync, such as Elements. Elements is similar to Textastic, but it doesn't have syntax highlighting.