One possible application that is "using" your files is your anti-virus software. If the anti-virus software is scanning the music on your computer, then the music is "in use by that other application". It could also be any other programme scanning files in order to protect your computer.
Try closing any applications such as these (temporarily of course) and see if you can then eject the iPod. If not, then closing down the computer will make it possible to remove the iPod safely, since nothing will then be using it.
Also, think of any other applications that might be using the music files, such as a music editing programme, if you edit an audio file, or Windows Media Player for example. It has been know for programmes to fail to release files after using them. In other words, the programme is no longer using the file, but it has not told your operating system (Windows 7) that it has finished with it. Consequently, Windows 7 tells iTunes that the file is still in use.
By the way, it's not an "iTunes malfunction". iTunes has been informed by Windows 7 that some of the files that you are syncing with the iPod are in use by another application (as it tells you). The assumption by iTunes is that the files are being, or are about to be, modified. Like all good computer programmes, it will not save a file to another location while it's being modified. To do so could cause the file to become corrupted.