I thought that smart playlists on an iPod did not update, because when playing the same playlist on my iPod mini, I found that after playing it for a while if I pressed Menu and looked at the tracks, all the ones that had been played were still there. What I had wanted was for the smart playlist to remove the played tracks, so that when I went back to the playlist, I could pick up where I left off. Curiously, at times the playlist did seem to update as I had wanted, and the first track would be the song I left off at. Lastly, after a forced-reset, even if the playlist had previously seemed to update, sometimes it would then be reverted back to the original state. Argh -- confusing!
I finally figured out what is going on: smart playlists do update on the iPod, but they only do so if you either start playing something else (a different playlist or a track you browse for), or if you go up to the top-level menu. Actually, I found that just going up one level above the list of tracks (i.e. to the list of playlists) *seemed* to make the playlist update, but this proved to be illusory - it didn't stick through forced-resets, and that's why sometimes a playlist would seem to have updated, but after a forced reset it would be back to its original state. If, on the other hand, you go up to the top level menu, it will update for real and that update will stick through a forced reset.
The forced-reset thing wouldn't be an issue except that my iPod mini, at least, has an annoying habit of not waking up from sleep if it has been sitting unused for a long time (24 hours or more.) It doesn't always fail to wake from sleep, but it happens too often, that's for sure. I then have to force reset in order to use it again, and typically I would find the smart playlist in an old state and I'd have to search for where I'd last left off.
So, if you get into the habit of pressing the menu button a bunch of times after you pause playback, in order to go up to the top level menu, you'll be sure to have the smart playlist update, and update in such a fashion as to survive a forced reset. And life will be good.

