1, 2- I thought that the latest update fixed the 2gb problem. With that in mind, you should probably make sure you have the latest version of the OS, which can be downloaded by running the update program that Nokia supplied with the 770, also available from nokia.com. (be sure to go to nokiausa.com if you are in the states). Also - if someone confirms that the 2GB issue has been fixed then get a 2GB card.

3- The must have programs... it depends what you want to do. As far as just using it to browse and newsread - the installed apps are fine. From there you should go to:
http://maemo.org/maemowiki/ApplicationCatalog2006
and try stuff out.

Have fun!