When you connect an iPod to a Mac with iTunes 7 or later, you may come across a situation in which the Restore button is dimmed (grayed out) and the iPod icon displayed is for the wrong iPod model as shown below.
This occurs when the iPodDriver.kext file doesn't load correctly, and it can happen with any iPod model that has a color display.
To resolve this issue, follow the steps in this article.