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Could you give some examples?
I'm not sure how iTunes converts the files, but I am pretty sure that photos with higher resolutions take up more space. Since I don't really have any photos, I don't have any numbers to share. But 500 photos should be less than 1GB for sure, probably even less than 500MB.
 
It depends on the resolution...

iTunes scales the pictures down(it refers to it as "optimizing"). Kind of annoying as my pictures were all 6 megapixels and I couldn't zoom very far in on my iTouch before it got pixelated...
 
iTunes scales the pictures down(it refers to it as "optimizing"). Kind of annoying as my pictures were all 6 megapixels and I couldn't zoom very far in on my iTouch before it got pixelated...

you can tell itunes not to optimize.
 
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