What version of iPod do you have? Windows or Mac?
I have the windows 10GB "old" one, and use EphPod. It will not update the free space correctly either. I formatted it once and loaded up my songs again and it displayed the correct amount, but after I added some songs later it didn't update the free space. I just came to ignore it since I hardly ever look at the "About" screen anyhow.
About the 9.2GB when it's empty- that's a nonconsistent use of the word "gigabyte". Stricly speaking, a gigabyte is 1 billion bytes. The 10 gigabyte iPod drive has 10,000,000,000 bytes of storage capacity, but it is not ten "computer gigabytes" Computer storage only comes in powers of 2, so a "computer gigabyte" is the first power of 2 that breaks a billion bytes, which is 2^30 or 1,073,418,240 bytes. So ten "computer gigabytes" is ten times this amount or 10,734,182,400 bytes, not an even 10 billion. This number is a little higher than the 10,000,000,000 bytes that your iPod drive has, thus the discrepancy.
If you actually do the math and divide your 10,000,000,000 bytes by 1,073,418,240 you get 9.32GB (computer gigabytes), which is what windows will report the actual drive capacity as. I'm assuming the software on the iPod or some other form of stored data will cut down the avaliable space to the 9.2GB you see reported on the iPod.
It's just a little marketing trick because 10GB sounds like more capacity than 9.31GB.
Ruahrc