I came here looking for the same answer. Figured it out on my own.
In Leopard....
Mac HD> Applications > Utilities > AirPort Utility.app (Or just Spotlight AirPort Utility)
Click on your Time Capsule on the side bar if it is not already selected.
Above the settings you will see some icons....Air Port, Internet, Printers, Disks and Advanced.
Click on Disks Icon.
Click on the Time Capsule at the top of the list (assuming you only have one). You will now see that on the right there is a Erase Button. CLICK IT!!!!
Are you sure > ERASE > ARE YOU REALLY SURE > Erase!!!
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