I am trying to set my Ipod to disk mode, but that function does not
show up highlighed when I go to preferences so I am not able to select
it. What do I do?

Set your iPod to be an external hard disk. 
Connect your iPod to your computer and open iTunes.

Select iPod in the iTunes source list.

Click the iPod options button in the lower-right corner of the iTunes window.

Click the ?Enable disk use? checkbox, and then click OK.

Close iTunes and notice that your iPod appears on your Mac desktop or
in the Windows Explorer on your PC.

To eject the iPod on a Mac, select the iPod on the desktop and drag it
to the Trash.

To eject the iPod on a PC, select the iPod in the Windows Explorer,
right click on the iPod and then choose Eject from the pop-up menu
that appears. Or at the bottom-right of the screen, click the ?Safely
Remove Hardware? icon.