If you encrypt an iPod backup on iTunes and then forget your password, you will not be able to restore from backup and your data will be unrecoverable. If you forget the password, you can continue to back up and use the device, however you will not be able to restore the encrypted backup to any device without the password. You do not need to enter the password for your backup each time you back up or sync.
If you cannot remember the password and want to start again, you can use a SmartKey iTunes Backup Password Recovery to unlock iTunes backup password at first. Check out http://goo.gl/fFR70s for more details.
If u plug it in to ur computer and go on itunes, there should be a page with just info on ur itouch with like and right in the middle of the page theres a button that says "reset ipod" and ot resets it completly. I had to do it once cuz i accidently put all of my moms werid songs on my ipod and didnt no how to take them off....
You have to hold the select key and menu key at the same time for about six seconds. I've done this severally and got a new password. However, you shouldn't disconnect your iPod even when the screen freezes up.