how do i restore my ipod touch 5g back to its factory settings?

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Go to Settings > General > Reset > Erase All Content and Settings

At what stage/step of the restore does it freeze?

Maybe:

Hang during restore process

Following Troubleshooting security software will frequently resolve this issue. This issue can be caused by the default packet size being set incorrectly. There may be third-party software installed that modifies the default packet size in Windows by inserting a TcpWindowSize or MaxGlobalTcpWindowSize entry into the Registry. Contact the manufacturer of the software that installed the packet-size modification for assistance in adjusting this TcpWindowSize values. Typically the default packet size is modified by 3G cellular network card software, ISP communication software, or Internet speed download optimization software. There are legitimate reasons to change the TCP/IP packet size and not use the Windows default settings (for example, network traffic optimization, home/broadband optimization, enterprise app optimization such as database apps, Exchange, and more). Deleting the "TcpWindowSize" or "GlobalMaxTcpWindowSize" entries in Windows Registry could affect the system's performance with other apps or on their network connections. Deleting the customized TCP/IP settings may require the reinstallation of any third-party applications that had modified the TCP/IP settings from the Windows default settings.

There are two ways to resolve this:

You can follow this article by Microsoft: How to reset Internet Protocol (TCP/IP) , or follow the steps below to manually find and remove TcpWindowSize and MaxGlobalTcpWindowSize entries from the Registry.

1. For Windows XP, Windows Vista, Windows 7: Go to the C:\Windows folder and launch regedit.
2. Go to Edit > Find.
3. Search for "TcpWindowSize" entries. There are typically multiple entries of TcpWindowSize/GlobalMaxTcpWindowSize spread throughout the entire Registry. If "TcpWindowSize" exists, one or more third-party applications have changed the user's default Windows settings for TCP/IP.
4. Go to File and select Export. This step will export a copy of the Registry that can be used as a backup of the original settings.
5. Delete the "TcpWindowSize" entry.
6. Search for the next "TcpWindowSize" entry and delete each one until the Registry no longer has any "TcpWindowSize" entries.
7. Close Regedit, restart the PC, and test.

If you are uncertain as to why these registry entries exist and the PC is a business computer, contact your network administrator and determine what values TCP/IP can be set in their Windows Registry setting so that the PC can update or restore an iOS device rather than deleting the "TcpWindowSize" entry.

If editing the registry does not resolve the issue, restoring on a different computer that did not install the communication software is the step most likely to resolve this issue.

my settings is gone and my ipod is stable