While iPods and iPhones can have fairly large storage capacities, people's music libraries often are vastly larger, resulting in them having to select a subset of their music to bring with them on the go.
To address this problem, Apple includes an option in iTunes to convert songs from higher qualities to lower ones at around 128Kbps sampling rates when being transferred to an iPod or iPhone. This saves on space, especially in environments where the higher quality in less compressed files is not needed.
While this process should save space, some people are finding that iTunes' size calculation for the transferred songs does not match actual size of the songs being transferred to their iPods, claiming their devices are full when in fact far less data has been transferred.
MacFixIt reader Jon wrote in with such a situation, and referenced this thread at the Dslreports forums where users were experiencing this issue, which has persisted even after people have removed their music and reset their phones.
This problem appears to be rooted in iTunes itself and not with the phone. It may be that some corruption occurred when applying the latest iTunes update, but regardless of the specifics, some people are finding that if they download the iTunes installer again and run it, the problem seems to go away.
People started noticing this issue with iTunes 10.5.1; the latest version of iTunes is 10.5.2 so if you are running 10.5.1 then be sure to update. Additionally, if you are experiencing this problem, try removing the iTunes preferences file from your system by choosing Library in the Finder's "Go" menu (in Lion hold the Option key to show this in the menu), and then go to the preferences folder and remove the file "com.apple.iTunes.plist." After doing this, download iTunes again from Apple's iTunes Web site and reinstall it.