If you forget your passcode how can you get back on your ipod touch?

Connect the iOS device to your computer and restore via iTunes. Place the iOS device in Recovery Mode if necessary to allow the restore.

If recovery mode does not work try DFU mode.

How to put iPod touch / iPhone into DFU mode « Karthik's scribblings

For how to restore:

iTunes: Restoring iOS software

To restore from backup see:

iOS: How to back up

If you restore from iCloud backup the apps will be automatically downloaded. If you restore from iTunes backup the apps and music have to be in the iTunes library since synced media like apps and music are not included in the backup of the iOS device that iTunes makes.

You can redownload iTunes purchases by:

Downloading past purchases from the App Store, iBookstore, and iTunes Store

That means that you did not get the iPod in either recovery mode or DFU mode unless you get that message a while after the download starts.

Try using this program to get the ikPod in recovery mode

RecBoot: Easy Way to Put iPhone into Recovery Mode