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Actually, the Touch has about 1360 MB free for the user to add books (at least under firmware 1.9.14), according to Windows.
Depending on the source, books can be huge (for example, "Hackers" by Steven Levy downloaded from Kobo is 6.41MB and "Hegemony or Survival" by Noam Chomsky is 6.77MB; only 2 books from Kobo I have) or tiny (most classics from Project Gutenberg are under 0.5MB, as are most of the books I've seen at Baen, which are all DRM-free).
Assuming the two from Kobo I have are average, you're looking at about 210 books on the device if you stick to paid content from the store. If you stick with the DRM-free books, at least from the two sources I use, you're looking at 2700 books, potentially.
(personally, though, I have a microSD card - too many factory resets to save books to the Touch's memory, so only ones directly from Kobo will ever go there)
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