From this Apple support document.
One more thing about disk capacity
In the iPod and iPhone About menu (and the iTunes Capacity bar), the disk capacity is reported as slightly less than the technical specifications for the device.
Why the difference? Most disk manufacturers measure disk capacity this way: 1 MB = 1 million bytes (1000 x 1000). A 4 GB disk, therefore, is one that holds 4 billion bytes. Computers, including Windows computers, Macintosh computers and iPod, measure disk capacity this way: 1 MB = 1 048 576 bytes (1024 x 1024). The difference in these two calculations is what causes the drive to appear as 3.7 GB on a computer, but actually be a 4 billion byte disk.