Restoring covered on page 214 of the following users Guide. You want to restore from backup.
http://manuals.info.apple.com/enUS/iPod_touch_iOS4_UserGuide.pdf
Since you do not know the passcode, if it asks for the passcode place the iPod in recovery mode and then restore. See the following for recovery mode.
http://support.apple.com/kb/ht1808
Restoring will erase the iPod and replace it contents with what is in the most recent backup and what is in the itunes library since some things like music are not in the backup. Like all things, restoring has a risk that something can happen and the iPod can just be erased. In that case you have to rebuidd the iPod.