How DID I get this much data on my iPod Touch 1st gen?

Question

ITunes on my brand new MacBook Pro shows 3762 songs at 62.84 GB with 99.9999% of them being AAC encoded.
My 1st gen 32GB iPod Touch holds ALL of that data, plus 210 apps -- and everything works/___sbsstatic___/migration-images/migration-img-not-avail.png Select any song at random and it will play. Select any app and it will run/___sbsstatic___/migration-images/migration-img-not-avail.png/___sbsstatic__ _/migration-images/migration-img-not-avail.png 62.84GB of songs on a 32GB Touch?? How did I do that? Plus, it STILL has 6.7GB available/___sbsstatic___/migration-images/migration-img-not-avail.png/___sbsst atic___/migration-images/migration-img-not-avail.png It's running iOS 3.1.3. I've added songs and apps over the years without any problems whatsoever.
My wife has a 30GB iPod Video White (5th gen) -- it has 4342 songs, with 9.4GB still available/___sbsstatic___/migration-images/migration-img-not-avail.png I loaded everything I had in my iTunes, and she's been adding songs on her own. So hers ALSO has more GBs of songs on it than it was made to hold. And hers works fine as well.
Now we get a brand new up-to-date 32GB iPod Touch 4th gen (Retina Display, FaceTime, etc). It's the latest and greatest (she got it through an employee incentive point plan at Boeing). I wasn't even thinking about how much data was in the 1st gen Touch -- my brain was just saying I've got all my songs and apps in my 1st gen, so I should be able to get all of it in the new 4th gen model. They're both 32GB, and the overhead (system, etc), is almost identical (okay, the 1st gen had 29+GB free and the 4th gen has 28+GB free). Still, pretty comparable.
I tried to sync iTunes with the new 4th gen iPod Touch and it says only about 1500 songs (of the 3762 total) can be loaded. That's it. No more/___sbsstatic___/migration-images/migration-img-not-avail.png That would also mean NO apps at all.
We tried to get this explained at a One-to-One meeting AND the Genius Bar at our local Apple Store, but NOBODY had an answer.
How is it that my old 1st gen 32GB Touch can hold more than twice the GB of songs AND 210 apps at the same time, and work, while the new 4th gen Touch is doing "sorta" what's expected of it -- that is, running out of space with only 1500 songs
One possibility is that both old iPod's began their lives under iTunes 9.x. But I've updated iTunes consistently as it has moved into v10 and both older models have had apps and music added using whatever the latest version of iTunes has been released.
Could that be the reason? Has anybody heard of this before? Can anybody explain it? The guys at the store were stumped. So am I. They "apologized" and said they understood how we felt, but there wasn't any resolution to the question. Other than -- DON'T mess with the old models as long as they are working Yeah, but I'd like to see the NEW model behave the same Wouldn't we all?

Answer 1

No, the option you mention is/was NOT checked. When I talked to two people at the Apple store (One-to-One) and the Genius Bar, they said that it was correctly set (that is, NOT checked), considering the files were ALREADY AAC encoded.
As I posted, pretty much all of the songs are already encoded as AAC files. They have all been captured off CD's in that format, or purchased from iTunes in that format. They were transferred to the 1st gen Touch in that format, and the attempt was made to make the exact same transfer to the new 4th gen Touch in the exact same format -- with the result that barely half would transfer over to the new Touch.
One would think that it might be set one way for the older model and one way for the newer, but that's not the case. As an FYI, I DID try checking that option after the first failure of getting everything to load, but it didn't make any difference.