I don't understand why everyone always says 16GB is not enough for video. You say you have plenty of XviDs @ ~1.5GB... Would you not be re-encoding these for the touch? I know its screen is significantly better than the QVGA of the classic, but even at 480x320, an H264 vid should not take up ~1GB/hr.
and most will be 16:9 letterboxed at 480x270 which should be even smaller..
I also imagine the touch/iPhone will scale a smaller res movie (if you are not a videophile) so you could take a letterboxed 480x270 and shrink to 400x225
or 360x202 and have the touch scale it up.
At those sizes with h264, you should easily come under a Megabit/sec...
In my case I would use about say 10GB for video / 4-5GB for music.
So, 1hour = 60 min * 60sec = 3600s
500Kbps * 3600s = 225MB/hr --- 10GB/225MB = 44.4 Hours
700kbps * 3600s = 315MB/hr --- 10GB/315MB = 31.7 Hours
900Kbps * 3600s = 405MB/hr --- 10GB/405MB = 24.6 Hours
I don't know about you, but holding 30+ hours of good quality video

at a time is definitely enough for me...