I am having this exact same problem with my Nano. I have been looking for 2 days and trying things and nothing seems to work.
I use my Nano at work on a iHome. I had not plugged it into a computer in quite awhile but did the other day and I got the "USB device not recongnized, it has malfunctioned etc etc."
I have tried the 5 R's.
I have reset it... alot.
I drained the battery.
I tried disk mode.
I tried more than one USB port, I even tried it on another computer, but no go. I have a iPod Video as well and it's working fine on any of the USB ports. Both PC's I tried have iTunes 7, which is why I was plugging in my iPod, to see if the Nano had an update. I have also uninstalled and reinstalled iTunes 7.
I have not tried uninstalling iTunes 7 and going back to the original install Disc yet. I also have not been to an iPod store yet.
But is there anything else I can try? Thanks. Losing my mind on this!
Oh, I'm on a PC by the way. Windows XP and all that.