Ipod needs to be put into discovery mode as well as the device that you are trying to connect to. Just turning on Bluetooth in the Ipod is not enopugh to get a connection. The two devices and any other devices that you want to connect to need to "Find" each other. Once that is done you should have no further problems.
SOURCE: 8GB iPod Touch Disabled
Thanks to everyone who provided solution inputs. I finally have my iPod back. The solution is: 1. Turn of your iPod. 2. While holding down the 'Home' button, connect to iTunes WARNING: Doing this will return your iPod back to original 'out of the box' settings and you will lose everything. On the bright side, you get a 'fresh' start and it will auto update to the most recent software version. Good luck!
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