ipod touch disabled due to too many incorrect password attempts - problem is I know the password

No. Start with the last paragraph of:

Disabled

Place the iOS device in Recovery Mode and then connect to your computer and restore via iTunes. The iPod will be erased.

iOS: Forgot passcode or device disabled

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: Back up and restore your iOS device with iCloud or iTunes

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 most iTunes purchases by:

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

If problem what happens or does not happen and when in the instructions? When you successfully get the iPod in recovery mode and connect to computer iTunes should say it found an iPod in recovery mode.

If you previously synced to the computer then you may be able to recover use of the iPod without erasing the iPod by following the instructions here:

Disabled Recovery-must use syncing computer.

Once it is disabled you have to restore using the recovery mode per the instructions in http://support.apple.com/kb/HT1212 you could also take it to an Apple store genius bar and see if they will let you use their system to restore it.