If you encrypt an iPod backup in 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/Mi2oK for more details
To reset your iPod touch without iTunes, you need to first turn your iPod off by pressing and holding the sleep button until a red slider appears to turn it off. You then need to turn it on by pressing and holding the wake button until the Apple logo appears. Go to http://www.ehow.com/how_6339924_reset-locked-ipod-itunes.html for more details.