The 8 gb I now have is sufficient as long as I don't go crazy loading pic folders on the phone. For the $99 cost of the phone it's well worth it. My wife upgraded my phone to a iPhone 4 from a blackberry 8350i. What a piece of crap that was.
No, you can't expand the storage space on the phone. One thing you might want to look into is DropBox for storing files and pictures and Air Video for streaming movies from your computer to your phone as an alternative to storing them on the device itself.