Previously, I posted the iPod Touch Rules! — By accident, I found a similar feature in the iPod Nano (second generation). It didn’t have this before upgrading iTunes.
I pushed the button a couple of times while playing a song and by the fourth push — I see lyrics! To scroll down, just slide the scroll wheel like you do for volume. Brilliant.
These work well and don’t require extra steps like some lyrics software. Just copy and paste lyrics into the lyrics tab and that’s it.