hmm...I dunno, it works with both my iPhone and my ipod nano (not sure what gen it is, it's the one after the square but before the camera) so it should work with you're ipod at least, and I'm pretty sure I read that it worked with the Driod so I'd figure it would work. But, to be honest, that button annoys the hell out of me - it's constantly pausing my music and skipping tracks while I'm skiing cause it get's pushed by my chin or something.
yeah, it's probably just that the nano doesn't recognize that button and neither does your phone.
And yeah, I think it's a blessing, I thought it was cool at first too cause I wouldn't have to take my ipod out of my pocket to change songs and stuff, but it just got so annoying - I actually went back to an old pair of iCon 1s I had cause it annoyed me so much. It's a cool idea, it just didn't work for me, I know people that use them and it doesn't bother them, but I couldn't stand it.