how "space" works, ill try to explain it best as possible.
you have a windows computer with a bunch of hard drives in it, lets say 160gb is your c:\ drive. 160gb is your spare drive. well you think to yourself lemme free up some space on my c:\ drive by installing all of my programs on the spare drive (d:\) as well as all my settings so that way just windows is on c:\.... (this is how android is set up, the "OS" is on /system and you cant touch it without root. while everything you add/install/download/etc, all goes to your /data partition)
so now you have all those programs on d:\ you keep downloading and installing apps... but youve got 160GB's so all is cool right? well as it turns out windows update... decided that your c:\ drive was a little full so all updates now go to your d:\ drive. so now you have your settings, programs and updates all on d:\ (which is where the market installs apps).
yet get a warning "whoa dude youve got low memory, cant install anymore programs!!!" so what do you do? you go to c:\ and think well hell i never use internet explorer... ill get rid of that, so now you freed up a bunch of space right?
nope. sorry you got some space on c:\ but that isnt where you are installing things... so it doenst even matter really.
the biggest issue you guys have is the google apps... like maps which is a fairly large program, and gets updates quite a bit you actually have two copies of it. one in /data/app (where market installs apps) and in /system/app (what came preinstalled on the phone) now you dont get to see how much space is available in /system/app so its just a guessing game.. if you really wanna free up some space, then get the latest apps and put them in /system/app replacing the older ones. (which is why any updates you guys get will "free up space" cuz they update the version preinstalled so it doesnt have to be on your data partition taking up your space.)
this is also why.. when you root putting su and superuser.apk on your c:\ drive doing a factory reset, doesnt change that... as imagine a factory reset formatting your d:\ drive.. it will clear out all your personal stuff, but leaves the os intact