Other is a number of things: album art, contacts, application data. It's not something you can access directly. 500mb doesn't sound excessive. If you see huge amounts of "Other" it usually indicates some corruption which can be fixed by restoring the iPod in iTunes.
In this Category, Album Art is stored. Files such as Calendar, Contacts and Games are also stored in the 'Other' category. If you use your ipod as an external disk and stored data on it then that data would also be stored under the 'Other' category.