I own a 3rd gen ipod nano. When I hooked it up to

You will want to force the iPod into disc mode before reconnecting to your computer for the restore process within iTunes. Below is a step by step on forcing an iPod into disc mode just in case you need the information.
Putting ipod into disc mode http://support.apple.com/kb/HT1363 Toggle the Hold switch on and off. (Set it to Hold, then turn it off again.) Press and hold the Menu and Select buttons for at least 6 seconds until the Apple logo appears. When the Apple logo appears, release the Menu and Select buttons and immediately press and hold the Select and the Play/Pause buttons until the Disk Mode screen appears.
Connect the iPod to your computer; the screen on the iPod will change and say "Do not disconnect" If you are having difficulty putting the iPod model into disk mode, set it on a flat surface. Make sure that the finger pressing the Select button is not touching the Click Wheel. Also make sure that you are pressing the Play/Pause button toward the outside of the Click Wheel and not near the center.
If you are still unable to put your iPod with a Click Wheel into Disk Mode, use one finger from one hand to press the Select button, and one finger from the other hand to press the Play/Pause button.