what does capacity mean

The difference between the 8GB "rated" capacity and 6.5 GB is due to the iOS taking ups some of the storage and of how GB is calculated and advertised. See Consumer Confusion in the following link:

http://en.wikipedia.org/wiki/Gigabyte

Available is how much free storage you have after adding music, app videos, contacts and other stuff.

An 8 GB Touch after formatting and with default software installed has a remaining capacity of about 6.5 GBs for user storage. 3.1 GBs available means you have installed roughly 3.4 GBs of stuff and now 3.1 GBs of space is left.

Capacity is the amount of space available. you have an 8GB touch. Sadly, when you look at the fine print on any storage device of any kind, you will read that the number of "GB" is based on so many billions of bytes... so 8 GB is 8,000,000,000 bytes.... However the "byte" system I'll call it... is not base 10... it's base 8... To get a true 8GB of space on your computer/storage device, your capacity should be 8,589,934,592 bytes... do you see the gap?

So.. based on 8,000,000,000 bytes (8GB)... you actually have about 7.45GB in the computer...So the system software that is on it, lowers the amount of space by 1GB, or maybe added to that if you use dropbox and have "local storage" things starred/favorited and stored locally or a mobile me account where things are stored locally. I don't know if itunes accounts for that use of storage.

Now when it says the amount of space you have availble now.. it's saying after all the media and information that you have put on your ipod that the remaining storage you have available is 3.1GB, which is fairly good! It's just giving you the amount of space left over after you've synced everything, and the color bar at the bottom of itunes shows you exactly where the storage is allocated to by the different colors. Music is one color, movies is another color, etc.

Hope this helps!