You won't be able to 'increase' the storage space.. your only 2 options are to
1. use a compression utility on the files before they are put on the drive... Winzip or Winrar... this will make the files smaller, and you can fit more on there (not much though)....
2. Get a new, higher-capacity drive, they are very in-expensive now... you can get a 512MB to 1Gig for less than $30 at most places.