To restore a password-protected iPod Touch:
1. Plug iPod into computer.
2. Hold down the power (top) button for about 5 seconds until you see the "slide to power off button"
3. Slide the red button.
4. Immediately hold down both power (top) and home buttons until you see the apple logo.
5. When you see the apple logo, release the power (top) button, but continue to hold down the menu button until you see a picture of a USB cable with an arrow and iTunes on your iPod.
6. Then restore your iPod with iTunes (remember this WILL erase everything off of the iPod, but hopefully your music is backed up on your computer/iTunes).
Hopefully this helps!