v4.0.2 works OK on my 8 GByte iPhone 3G.
Works fine on mine as well. No noticeable performance degradation. Backup and upgrade from V 4.0.1 took just under 10 minutes.
As others have suggested I took a look at an iPhone 4. Granted it looks and feels nice but I do not think it is for me. My 3G offers me all I need in the way of apps, phone calls and internet access. If I want to take pictures and HD video I use my 21.5 mpxl DSLR.