I was having this problem last night. Have no fear, all you need to do is manually download the ipsw files, and then you can update to 2.0.0. Once you get that far it is a piece of cake.
if you are at 1.1.5 or below itunes and your ipod keep getting in this circular battle of:
ipod: YOU UPDATE
itunes: NO YOU UPDATE
ipod: NO YOU UPDATE, DOUCHEBAG
itunes: YEAH WELL YOU ARE A BUTTHEAD, BUTTFACE
ipod: YEAH WELL AT LEAST IM NOT A RESOURCE HOG
itunes: that was a low blow 🙁