I finally let iTunes have time with the nano and it eventually popped up the following window:
"iTunes cannot read the contents of the iPod "<name>".
Go to the Summart tab in iPod prferences and click Restore to restore this iPod to factory settings."
Then iTunes beachballs again.. then eventually shows me the restore screen. I restore and after the nano reboots.. iTunes once again beachballs and eventually shows the Welcome to your new ipod sceen. It starts to sync, then eventually errors out with The iPod "<name>" cannot be synced. An unknown error occurred (-54).
It's almost like there's something blocking the hardware from mounting or something. This doesn;t happen on any iPad's or iPhones. Disk use is enabled, but I cannot turn it off. I wish I could as maybe that would help.