Apple yesterday released iPod Reset Utility 1.0.3 for Mac and Windows which restores the following iPod models back to their factory settings, when iTunes is unable to do so:
• iPod shuffle (1st Generation)
• iPod shuffle (2nd Generation)
The restore process completely erases all music and data on your iPod, and installs current iPod software on it.
• Mac OS X 10.3.9, or later*
• Windows 2000 with Service Pack 4, Windows XP with Service Pack 2**
*Mac OS X 10.2.8 customers with an iPod shuffle (1st generation) can use the iPod shuffle Reset Utility
**iPod Reset Utility 1.0.3 is not supported for use with Windows Vista
More info about iPod Reset Utility can be found here.