In iPod's About menu, the hard disk size is reported as slightly less than the technical specifications for the iPod. The same is true if you connect iPod to your computer in disk mode look at the info or properties window for the disk.
Why the difference? Most hard disk manufacturers measure disk size this way: 1 MB = 1 million bytes (1000 * 1000). A 4 GB disk, therefore, is one that holds 4 billion bytes. Computers, including Windows computers, Macintosh computers and iPod, measure disk size this way: 1 MB = 1 048 576 bytes (1024 * 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.
For more, see this article:
http://docs.info.apple.com/article.html?artnum=60955 You also need to remember that some space on your iPod is already taken up by the operating system.