Have you tried rebooting (with iPod attached) and holding down the option key as you do, and see if it comes up in the list?
P.S. You may wanna think about upgrading your OS - everything gets a bit easier if you are up to date.
P.P.S - The iPods aren't really intended for this - i remember reading that they require something special to be enabled as a bootable volume. A Google of "Boot from iPod" turned up this as the top result:
http://www.engadget.com/entry/8817137592535661/
I really wonder why people ask questions on a forum when google turns up the solution to 90% of the problems.