If you do not know the passcode, your only option is to connect the device to iTunes in Recovery Mode and restore it to factory settings. See this article for instructions on getting your iPod Touch into Recovery Mode.
I think that I do know what the passcode is (per my daughter anyway so there's every chance that it will be wrong) but hey lets assume that I do know it!!!
The main issue is that once it's connected to itunes the itouch shows the following message:
"iPod is disabled
Connect to itunes"
There is no other option available to me and itunes shows this message:
"itunes could not connect to the ipod "Naomi ipod" because it is locked by a passcode. You must enter the passcode before you can access itunes"
My problem is that I cant access the ipod to enter the passcode. The only option that I seem to have is to hold the button down on the top of the ipod which then power don's the ipod.
If that doesn't work, do a force-restore. Hold both the Sleep/Wake and Home buttons until the Apple logo appears, then release just the Sleep/Wake button while you connect to iTunes -- keep holding the Home button until iTunes recognizes the iPod is connected. At that point iTunes will prompt you to Restore the iPod, and you can re-load the last backup at the end of the Restore (assuming you do this on the iPod's home computer).