I booted windows 7 on my MacBook and reformatted my iPod to exFat and restored my iPod in iTunes while booted in Windows 7. I did an initial sync in windows.

I rebooted into Mac OS 10.6.8 and synced my full iTunes library! Pretty strange that windows had no problem reformatting and restoring my iPod Classic and nothing worked at all from Mac OS. Apple must have jacked something up. I'll be keeping it Windows formatted from here on out.