reset ipod and passcode

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

iOS: Wrong passcode results in red disabled screen                         

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

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