Yes they will.
This is incorrect. You cannot return an iPod with engraving and get your money back simply because you no longer want it.
When ordering, Apple clearly states that custom orders (such as engraving on iPods and non-standard configurations on computers) are not returnable.
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Apple Store Returns & Refunds
"If you are not completely satisfied with your purchase, you may be eligible to return the item for a refund.
Returns policy
Returns are subject to Apple's Sales and Refunds Policy. You have up to 14 days from the time you receive your item(s) to initiate a return. For products purchased between October 31, 2007 - December 24, 2007, you may request an RMA by January 8, 2008. A 10% restocking fee will be assessed for opened items. Shipping fees are not refundable.
Items that cannot be returned include:
1. Product that is custom configured to your specification
2. Opened memory
3. Opened software*
4. Electronic software downloads
5. Engraved iPods
6. Software Up-to-Date Program Products (software upgrades)
7. Apple Gift Cards
8. Apple Gift Packaging (origami style gift box with ribbon and greeting card)
9. Apple Developer Connection Products (Membership and Technical Support)"