Like any computer, an iPad has two places to keep stuff. Storage, where all the apps, their documents & settings and their temporary files get placed, and which you can elect how much to get when you purchase the device (16GB vs 32GB vs 64GB vs 128GB). And the internal memory or RAM that the CPU uses to do its immediate computations: that is fixed (1GB or 2GB, depending on model) and can't be chosen when you buy, it was fixed by Apple when they designed the devices.
If you run many apps at the same time and/or do complex stuff in them (large spreadsheets or documents, complex games, etc.), the RAM may not be enough. And you get the message. Storage is fine but memory ran out. So you either unload apps not in use so the RAM they took is returned to the common pool, do a Force-Restart as Brian suggests and hope for the best, or watch as the current app eventually crashes.
Here's a pic of my iPad's current memory allocation, as displayed by theiMySystem utility:
