There's very little to the rumor, beyond the fact that 9to5Machave "gotten word from sources" that a 128GB iPad is going to be slotted in alongside the current 16GB, 32GB, and 64GB models. According to the rumor, the iPad wouldn't be a new model, but instead an update of the existing iPad 4.
There have also been some code references in beta versions of iOS 6.1 pointing to a 128GB iPad too, but rumors based on findings within iOS beta code are notoriously inaccurate.
I find it unlikely that Apple has a new iPad 4 model in the pipeline, mere months after launching the iPad 4—essentially an iPad 3 with updated processor and Lightning port. Consumers were upset when Apple moved the iPad refresh data from the usual March to November.
It also doesn't make sense that Apple would add a new storage size to the line-up, when both the iPad and iPhone has always been offered in three storage capacities.
I have little doubt that a 128GB iPad is indeed in the pipeline, but that it will be a new model—perhaps the iPad 5—and that its debut will be concurrent with the elimination of the 16GB model. This would allow Apple to retail the existing pricing structure for the iPads, with the 128GB model costing $699 for the Wi-Fi model, and $829 for the Wi-Fi + Cellular model.
128GB of flash memory would cost Apple less than $80, based on current supply chain prices, compared to around $40 for 64GB of storage, but the $699-$829 price tag commanded by the high-end iPad more than covers this increase in component costs.
Another thing worth bearing in mind is that Apple has never bumped the storage of any iOS device outside of a refresh of the product [UPDATE: Apple silently bumped the storage on the original iPhone and iPod touch from 8GB to 16GB]. The idea that will start doing this now—and with the iPad, a device that is selling very well—is preposterous.
So yes, we are likely to see an iPad with 128GB of storage sometime in the future, but the idea that Apple is going to release it before the next iPad refresh is highly unlikely.