Yikes, I've never seen this icon before and it sounds like the hard drive died on our trusty Color iPod. How sad!
Sad iPod icon with exclamation point
This also relates to the diagnostic software noted above. The icon means that the disk scan was not able to recover the hard disk data. When this happens, try the steps here first.
n most cases, the sad iPod icon indicates a hardware issue. If you are able to force iPod into Disk Mode, then it may not be a hardware issue, and you should try to restore your iPod with the latest software.
# Before placing the iPod into disk mode, you should verify that it is charged.
# Toggle the Hold switch on and off. (Set it to Hold, then turn it off again.)
# Press and hold the Menu and Select buttons for at least 6 seconds until the Apple logo appears.
# When the Apple logo appears, release the Menu and Select buttons and immediately press and hold the Select and the Play/Pause buttons until the Disk Mode screen appears.