Wrong password 2nd gen iPod Touch

I decided I should have a password for my 2nd gen iPod Touch after accidentally leaving it in a bar.

I created a password, confirmed it and 5 minutes later entered it to get into the iPod and it said it was the wrong password!

It was NOT the wrong password. In total disbelief, I tried a few more times until I realised if I kept going I would be locked out. I have perhaps 3 more attempts.

How can reset the password, or restore my data without losing all my data? I don't want to have to restore the facory setting ans lose my personal stuff.

Why does it not recognise the password?

When connected to iTunes, the only option is to Restore the original settings...presumably, that's the Factory settings.

Thanks,

Ros