I have lost two hours searching for the answer to the question above.
Here is the quick fix for your problem (WARNING: the following steps will DELETE ALL AUDIOBOOKS which you have downloaded through OverDrive Media. If audiobook had not expired - it will still be available through your Overdrive Media Console, and you can upload it through your iTunes later. If the book has expired, you will have to get in line and place a loan again through your library or source you are using.)
1. Connect your iPod Touch to your computer.
2. iTunes will open autometically if you set it up to do so. If not - open your iTunes.
3. Click on your iPod icon under DEVICES.
4. Choose SUMMARY among the folders displayed on the upper part of the window (among APPLICATIONS, MUSIC, MOVIES, etc.)
5. On this page, under OPTIONS deselect MANUALLY MANAGE MUSIC AND VIDEOS.
6. iTunes will start automatically update and sync your library content, along with deleting your audiobooks.
7. Check your Auidobooks folder on you iPod Touch - it should be clean and clear of any content.
8. To upload new books you have available through your OverDrive Media Console, follow the usual steps for audio materials transfer (read OverDrive Help if needed).