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I can see the capacity being bumped up to 32GB as a minimum, but the iPad will almost certainly meet the target of $500 with a high end model at under $1000. Considering that while the cost of flash memory is still dropping, it still hasn't dropped enough to see more than 128GB while still hitting the sub $1000 mark the iPad has now.
As far as SD card support goes, it is rumored that the iPad 2 will be getting an SD card slot, but I doubt it will be anything more than an integrated camera connection kit and won't be useful as a way to upgrade the memory. If you will be able to access the SD card's memory at all, it'll only be for document and media storage. There's no way Apple would let you install and run apps through an SD card.
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