The amount of space left on the iPod many (and ANY mp3 player for that matter) will depend on the quality of the Songs. Here's a good article showing the bitrate vs. size:http://www.bellaonli...es/art17930.asp
Basically, the higher the quality, the larger the file.
128k bitrate is essentially "CD-Quality" in the example from the article, a 6 second file that was originally 1mb in size as a WAV is 97kb.
In something with the capacity of the iPod and other harddrive-based MP3 players, You can stick with 128k or even higher, if you're an audiophile and can claim to hear the difference... But if you're just ripping you're CDs, there's no point really in ripping them at a higher quality than they normally play.
As for a 4gb iPod showing 3.7gb, you'll find that on all MP3 players. The "missing" space is usually reserved for system files that allow the player to operate correctly. (plus, alot of companies will round up when its that close)