http://support.apple.com/kb/ht1212 will help you.
Connect your IPOD Touch to iTunes
Press or Hold the power and home keys 10 seconds.
Screen goes black, now release the power button
Make sure you do not release the Home key until your iTunes says "We have detected an itouch in recovery mode."
After this its simple all you got to do is a simple restore using your iTunes.
There is a also way to reset it without losing the data from your ipod :
first plug in the ipod, go to my computer, click on the ipod drive. Go to tools > folder options then click view. Click show hidden files,
Go to ipod_control, then go to device. There should be a file named "_locked" delete that. Now unplug the ipod and you should be ready to go. Good luck and let us know if it worked.