The space isn't the problem, the cost is. Apple (probably rightly so) doesn't want to put a magnetic hard drive in an iPad because of robustness and speed, so they use flash memory like all current iPods/iPhones except the classic. Flash memory is expensive, and gets quickly more expensive as you increase capacities. For a 128GB iPad they would probably end up charging something well over $900.
Like the iPods and iPhones they'll use large enough capacities to justify pricing but not so large as to push cost outside of their desired window, and adjust capacities year over year as costs decline and densities increase.