All through the product time lines you have lost space on portable media players to formatting.. but the iPhone OS on the iPod Touch/iPhone seems to take space loss too far. On a 8gb iPod Touch 2nd gen all that shows up as usable from the 8gb is 7.01gb. The big issue is that it uses 473mb for its os partition… and that means you only get around 6.5gb usable store media/apps/videos.
I discovered this via the $2.99 System Activity Monitor app from App Store, Also I compared the capacity of my 2nd gen iPod Nano and 2nd gen iPod Touch.
Here is the details on the disk usage inside my iPod Touch 2nd Gen