My daughter has not used her ipod touch for 16 months and has forgotten her passcode.  restore factory settings keeps failing due to a software update failure!

my daughter has not used her ipod touch for 16 months and has forgotten her passcode.  restore factory settings keeps failing due to a software update failure!
how can i get this ipod reset.  She now has an iphone so this is going to be used by someone else in the family and should be simple to do but itunes just keeps booting it out even though it recognises that it was previously connected to our itunes account as all of the children were on my account

That has nothing to do with an update server. Do the following:
Place the iOS device in Recovery Mode and then connect to your computer and restore via iTunes. The iPod will be erased.
iOS: Forgot passcode or device disabled
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
To restore from backup see:
iOS: Back up and restore your iOS device with iCloud or iTunes       
If you restore from iCloud backup the apps will be automatically downloaded. If you restore from iTunes backup the apps and music have to be in the iTunes library since synced media like apps and music are not included in the backup of the iOS device that iTunes makes.
You can redownload most iTunes purchases by:                         
Downloading past purchases from the App Store, iBookstore, and iTunes Store        
  If problem what happens or does not happen and when in the instructions? When you successfully get the iPod in recovery mode and connect to computer iTunes

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