Why is the usable space on an iPod always less than what it says?

This is very common when it comes to hard drives. You buy a 120GB (Giga byte) hard drive and when you have formatted it, you only can use about 116GB. This is really just a math problem and the difference between the way the hard drive companies measure them and what you see on the OS. From the very good Apple Knowledge Base article.

"Most hard disk manufacturers measure disk size this way: 1 MB = 1 million bytes (1000 1000). A 5 GB hard disk, therefore, is one that holds 5 billion bytes. Computers, including the Macintosh and iPod, measure disk size this way: 1 MB = 1 048 576 bytes (10241024). The difference in these two calculations is what causes the drive to appear as 4.6 GB on a computer, but actually be a 5 billion byte hard disk."