it requires some finagling in Terminal, but should not be too hard.
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: GUID_partition_scheme *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: Apple_partition_scheme *27.9 Gi disk2
1: Apple_partition_map 31.0 Ki disk2s1
2: Apple_MDFW 64.0 Mi disk2s2
3: Apple_HFS Hobbsit’s iPod 27.9 Gi disk2s3
So, basically, disk 0 above is my computer’s internal HD and disk 1 is my iPod in this case. Remember the number of your iPod disk.
Open Disk Utility. Basically, you have to unmount the drive to make it formatable without the “Resource in Use” error….at least in my case. 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, so type it in if prompted.
Once the iPod is formatted, pop open iTunes (if it does not auto-pop) and restore it.
And explode into dance.
Source:
http://discussions.apple.com/thread.jspa?threadID=1421052&tstart=1