Convert to 128kbps space calculated incorrectly

I've recently re-copied all my CDs up to 320K VBR and have selected the 128kbps option in iTunes 10.1
When I last synch'd my iPhone it told me I would have about 8GB left and at the end of the sync it confirmed I had 8GB free space.
I reset the iPhone and checked again...this time it says 2.5 GB free and if I UNCHECK the option to convert high bitrates to 128K, the free space goes UP to 8.1GB again.
I left the 128k option ticked (2.5GB remaining) and hit sync again...the space increased to 8.1 GB until the sync copied a single song over then i decreased to 2.5GB free again.
Next sync says 8.1GB free.
iPhone is running 4.2.1
Anybody know what's going on?

Well that bites doesn't it?
I've done a little bit of reading and I now have a theory as to why this is. iTunes does this for mobile phones too, and I think it's because mobile phones and the Shuffle cannot play all formats (the Shuffle cannot play Apple Lossless files) so iTunes includes this option for them. It seems a bit of an oversight not to have it for other iPods too.

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Convert to 128kbps space calculated incorrectly

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