The N1 has just 512mb flash built in, and while it has a Micro SD slot for your media, Android will only use the system flash for storing the OS, apps, and app data. They screwed up earlier with the G1 which only had 256mb, not enough to install any official OS updates, and instead of learning their lesson they just bumped it up one notch.
While users may plead loudly about how they want expandable storage, they fucking hate it when you make them manage what's stored where, and this is not a UI area you're going to be able to polish. 4gb of flash is the bare minimum you can get away with, and premium SKUs with 32gb+ are a given -- this is your chance to pile on markup without anyone complaining.
Apple's abhorrence towards removable storage isn't just because Jobs is a dick, or the form factor compromises, but simply because it's a usability nightmare.