tony montana, give this a try. I know sounds cheesy but go ahead, just in case. Plug your cable into the computer but not the iPod. Hold down the menu and the center button until the apple sign appears, then as quickly as you can hold the center button and the play button down. When the disk symbol shows up in the middle of the ipod, plug your ipod cable into the usb port. Now if that does not work and you have access to a Mac here are some instructions I got from somewhere of the internet and kept them on my ipod service manual site So got to give credit to the unknown author ;-)
First, connect the iPod to your computer and open Terminal. Type:
diskutil list
You will get a list something to the effect of:
/dev/disk0
#: TYPE NAME SIZE IDENTIFIER
0: GUIDpartitionscheme *931.5 Gi disk0
1: EFI 200.0 Mi disk0s1
2: Apple_HFS Macintosh HD 931.2 Gi disk0s2
/dev/disk1
#: TYPE NAME SIZE IDENTIFIER
0: Applepartitionscheme *27.9 Gi disk2
1: Applepartitionmap 31.0 Ki disk2s1
2: Apple_MDFW 64.0 Mi disk2s2
3: Apple_HFS Hobbsit’s iPod 27.9 Gi disk2s3
So, disk 0 above is your computer's internal HD and disk 1 is your iPod in this case. Remember the number of your iPod disk.
Open Disk Utility. You have to unmount the drive to make it formatable without the "Resource in Use" error..... So, eject the disk in Disk Utility (the application).
Once ejected, go back to Terminal and type this command:
sudo diskutil eraseDisk HFS+ iPod disk1
Where the "1" in disk1 is replaced by whatever number your iPod appeared as in the list from the diskutil list command. You may be prompted for your admin password, type it in if prompted.
Once the iPod is formatted, pop open iTunes (if it does not auto-pop) and restore it. Some users found that it would give errors when they disconnected the iPod. So instead to eject the iPod from the disk Utility, just left it there, then it should create the formatted partition. You should now restore it from the itunes. I do hope it helps. Again I can not verify the Mac instructions since I am a PC person...yes I know ;-) Good Luck and let us know how it is progressing.