Clicking on the Notes button activates the Notes window. You can select specific categories, to transfer all of the notes contained within those categories, or transfer all notes to your iPod.
Each note will be transferred as a Contact or Note entry. For Contacts, each note will have the title *title (appending a number to notes spanning multiple entries to indicate/manage text ordering). For Notes, the notes are organized by category within Notes. Note that Notes are only supported on current iPods.