I had a similar issue while installing the update for my iPhone 4 32 GB. I made sure I backed up both my iPhone and iPad before updates just in case anything crazy were to happen. (It never fails, those of us who are anxious enough to download huge updates right away are the ones that run into the glitches and slow servers!)
Anyways, I had around 9.2GB left before the update. During the process, not only did my iPhone fill up, the meter at the bottom said I was over my capacity by 6.4GB. I almost lost my mind when I saw that, but let the update continue.
Luckily, when everything was done, I re-synced my iPhone with my computer, and I got all of my space back to around 9.0GB. Still not what it was before, but I'll blame that on extra files and new features that came with iOS 5.
Hopefully the rest of you who are having this issue have your iDevices clear things up for you. If not, I'm sure Apple will have an update available in no time to address the issues a lot of people have been having during this update. Good luck!