From the Users manul:
Important: If you forget your passcode, you must restore the iPod touch software from
iTunes. See “Updating and Restoring iPod touch Software” on page 214.
Restoring iPod touch
Make sure you have an Internet connection and have installed the latest version of
iTunes from www.apple.com/itunes.
Restore iPod touch:
1 Connect iPod touch to your computer.
2 In iTunes, select iPod touch in the Devices list, then click Summary at the top of
the screen.
3 Click “Check for Update.” iTunes tells you if there’s a newer version of the iPod touch
software available.
4 Click Restore. Follow the onscreen instructions to complete the restore process. When
restoring, it is recommended that you back up iPod touch when prompted.
When the iPod touch software has been restored, you can either set it up as a new
iPod touch, or restore your music, videos, app data, and other content from a backup.
After you restore from a backup, previous data is no longer accessible through the
iPod touch user interface, but it isn’t erased from iPod touch. For information about
erasing all content and settings, see “Resetting iPod touch” on page 170.
You want to restore it to new condition. If you use a different computer than it was last synced to you may have to place it in recovery mode first. See:
http://support.apple.com/kb/HT1808
