A report today from MacCentral regarding some problems with the iPod update recently released coinciding with iTunes 4.5.
I've personally run this on two second generation iPods and a 3rd generation iPod without problems, but I have heard of one 1st generation user that had a problem. His iPod was plugged in as the update was downloading and it ran immediately, and somewhere along the line locked up his iPod to the point that it rebooted wtih the flashing folder icon.
He was able to resolve it by rebooting his Mac and letting Disk Utility reformat his iPod as a Firewire drive, then ran an older iPod updater to restore the unit, then the new updater ran fine.
So far, I've not heard of any units permanently damaged by this, but it isn't clear why some units aren't updating as they should. As I see it, there probably isn't any reason why most folks shouldn't run the update now, but regardless Apple will probably have a fix for this soon.