David said it well. Your "two gig" drive actually has a capacity of two billion bytes, not 2gigabytes. David also shows the math, which is very helpful.
Drive makers like to say that their products are as impressive as possible-think of a guy sleazily trying to impress a girl with his "manliness..."
Also, as Dark Helmet says, there's some overhead needed by the iPod; it has an operating sytem and some drive-based storage for options and settings.