@Maharg
I can only say that having made an excessive number of Iflash Ipods, I'm pretty sure I remember encountering exactly the same sequence of errors as you describe at some point. It's hard to recall because the whole process of getting iFlash mods to work remains very mysterious to me, I've had all sorts of strange problems come up (e.g. two particular memory cards where either would work on their own, or when paired with different cards, but which refused to work together in the same ipod, or another ipod which works perfectly well with the one quirk that if you 'reboot' it just turns off and then you have to press another key to turn it on again), and in most cases the problems eventually get resolved but I can rarely figure out what I did that changed things. I must have eventually solved the problem you describe because I don't have an ipod that has that problem now and yet I know I did at one point! (and I haven't thrown any away!)
So I reckon if you can face the effort it's worth persevering, and going back to the beginning and reformatting all the cards with a card-reader. Maybe even let windows reformat the ipod when it asks and see if you can proceed from there.
There seem to be many different faults that can be hard to distinguish from each other.
For example, a failure to reboot can be because of a problem with the click-wheel (so it's not picking up the reboot keypress correctly). Or with the battery (one battery I had seemed to be cutting out whenever the ipod tried to restart - possibly because the pressure involved in pressing the buttons to reboot affected the battery cable - even though it seemed to be working the rest of the time).
Also a bad iflash/hdd cable can cause problems, you could try changing that.
@tgmondalf
Not a helpful thing to say at this point, but it seems a very bad idea to have unique data only on an ipod (or memory card).