I can't restore my iPod: Haven't seen this on any of the forums!!

I will try to make this brief to save time.
I connected my 4G iPod Photo.
iTunes started up.
Got the "corrupt iPod" message.
Clicked "Restore".
Connected to charger to complete the restore.
Restore completed fine.
Connected the iPod again.
iTunes started up.
Got the "corrupt iPod" message again.
I have done every possible troubleshooting step, both here on the Apple site and on the wonderful WWW.
NOW, here is the issue I have, that I haven't seen anywhere else...please read and understand this part!
- When I plug the iPod into the computer, I hear the USB connection sound.
- I check My Computer and there it is; Drive E: IPOD
- I go to iTunes Help > Diagnostics > iPod, and the green dot is there.
- I check the Diagnostics report, it shows my iPod is "truly mounted", has the correct serial number, correct iPod software version etc etc
- Here's the kicker: After all this, the iPod does NOT show up in the pane on the left side of iTunes!! I have uninstalled then reinstalled iTunes, I have version 7.1
- I cannot restore it again, because it doesn't show up for me to restore! But the Diagnostics in iTunes say it is there and mounted. I also cannot format it in My Computer...I click 'Format' and nothing happens. So I am stuck in a loop.
Can anyone please help? THANKS!

What model was the old iPod?
What model was the new iPod?
The new one has to be same or newer model than the old iPod
First just set the iPod up as new.
Then update the iPod by going to Settings>General>Software Update
After upodated go to Settings>General>Reset>Erase all Content and Setting. \When done setup by restoring from iCloud backup

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