Here's what my iPod nano manual says.
Updating and Restoring iPod nano Software
You can use iTunes to update or restore the iPod nano software. It is recommended
that you update iPod nano to use the latest software. You can also restore the software,
which puts iPod nano back to its original state.
* If you choose to update, the software is updated, but your settings and songs are not
affected.
* If you choose to restore, all data is erased from iPod nano, including songs, files,
contacts, photos, calendar information, and any other data. All iPod nano settings are
restored to their original state.
To update or restore iPod nano:
1. Make sure you have an Internet connection and have installed the latest version of
iTunes from
www.apple.com/ipod/start.
2. Connect iPod nano to your computer.
3. In iTunes, select iPod nano in the Source pane and click the Summary tab.
The Version section tells you whether iPod nano is up to date or needs a newer version
of the software.
4. Click Update to install the latest version of the software.
5. If necessary, click Restore to restore iPod nano to its original settings (this erases all data
from iPod nano). Follow the onscreen instructions to complete the restore process.
