Is your iPod a solid state model or one with a hard disk? (Like, is it a nano/touch or is it a bigger model?) Many friends of mine with hard disk iPods, especially the 5th gen video ipods, seem to have problems with corrupt drives in their iPods. These problems seem to be isolated to hard disk iPods; nanos and touches dont seem to suffer as badly.
From what I can understand, the problem lies with the hard disk itself. If the iTunes restore is not working, the next step is to attempt to recover the entire drive. The easiest way to do this is to reformat the disk. On an apple computer, this can be done with the 'Disk Utility" application. Simply select the iPod hard drive from the side menu when it is plugged in. On windows, I believe you need to access the drive from the 'My Computer' menu, and then select drive option>advanced>reformat, although I'm not quite sure. If the drive reformats correctly, try restoring it again with itunes and it should work.
If you cant reformat the drive, there is most likely a rather serious error caused by some physical damage to the drive, (likely water damage or the read/write head has had a collision with the drive disk). I believe you MAY be able to fix this by partitioning the drive and trying to find what part is corrupt, although even if this works it will mean you only have half of the ipod space you started with.
If the above didnt help/work, its time to get a new hard drive for your iPod, or just a new iPod. If you've actually got a nano or other solid state iPod and Ive typed this for naught, then I have no idea what the problem may be.
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