Question: My daughter set a password on it and now does not remember it, how can I remove/reset the password?

The software version is 3.1.3.

Answer: 
I have an iPhone, not the touch, but it is probably similar...

You should be able to restore it to factory settings (including no password, removing all data though) from iTunes.

Plugging the iPhone into my computer and opening up iTunes, if I click on the iPhone in the left column of iTunes, there's a `Restore` button shown in the Summary tab. As far as I'm aware, this will remove your passcode lock when it restores the phone (and wipes all data on it). You could also restore from a specific backup if you know what the passcode was at the time of that specific backup (assuming you've got backups enabled in iTunes).
If you don't have iTunes on your computer they will do it for you in the apple store.