I think 16gb works fine. When we had xp on ours, it took up about 7gb and now that we have Snow Leopard, it takes about about 7gb.
So, save some money and get the 16gb and get the 2gb of memory. I picked one up last week on a special from New Egg for about $35.
Also, my wife's came with xp, mine came with ubantu, but I snow leopard each. xp was very slow and clunky and crashy. Ubantu was gone off mine within 24 hours, didn't give it much of a look. SL makes all the difference.
As to whether to return it, we think they are the perfect little travel computers, rather than lugging a heavy laptop around. If your on the road expectations are email, web surfing, light word processing, and video skype, you probably won't be disappointed. It is not a heavy duty laptop and it does not appear to be designed to be one.
Good luck with your decision.