My Cell

Here is easiest and tested solution to unlock a password  locked iPod.
Data loss chances in this method are minimum unless you do something silly..
Here we go
Step 1:
Make sure you have enabled to see hidden files on your PC.

1. Go to My computer
2. In Tools select Folder Options
3. Click on View and enable “Show hidden files, folders and drives” option
4. Click apply and then OK

Step 2:

1. Connect iPod with PC via USB cable
2. Go to My computer and open your iPod ( It should be shown as removable drive )
3. Double click on “iPod Control”
4. Double click on “Devices” 
5. Delete the file named “_locked”
   
6. Detach iPod from USB and now you should have Password free iPod. Enjoy..