1. iTunes does panic when a firewall is activated. I think it uses port 6389. So if this is not allowed, it simply means iTunes will be unable to share over a network. Nothing important really.

2. Manually update your iPod; see How to transfer music to my iPod (& iTunes) (all of page 1 !!!)

Edit: The LW playlist within iTunes is simply a playlist. You cannot copy those files only play them. You need to follow the directions in the step #2 link I gave above. ie: get them into iTunes music library 1st before copying to nano ipod.