First, this is for Macs. There is no tool for Windows yet. If you have Windows, you need to find some kind Mac user on the internet who is willing to send you the custom restore firmware that Pwnage creates for the iPod, unless that method does not work. I have not tried it.
Second, this is how I did it last night. I am not saying this is the correct way or the best way. I'm sure I screwed up somewhere along the way. However, I did get it working.
1. Grab a copy of the Ipod 2.0 official firmware that Apple released. If you officially upgraded, this should already be on your computer and you can go to Step 2. If not, see Step 1.a
1.a If you do not have the official firmware on your computer yet, either download it from Apple (not sure if you have to pay before you download or if it just prompts for the $9.95 when you want to install) or Google iPod1,1_2.0_5A347_Restore.ipsw and download the file. It's 200+ megs. When you have downloaded the file, Place it in Library/iTunes/iPod Software Updates.
2. Connect your iPod Touch to your Mac. Ignore Itunes and its requests to install that firmware you have.
3. Download and run Pwnage 2.0. Select iPod Touch from the middle of the screen and click Continue. At this point Pwnage should automatically locate the official Apple firmware on your hard drive. It will appear in the middle of the screen. Click it and then click Continue.
4. Pwnage will use that official firmware to build a custom firmware for your iPod Touch. This may take a bit and it may prompt you to enter your password. When it is finished, you should see iPod1,1_2.0_5A347_Custom_Restore.ipsw in the folder where the Pwnage app is located (I just had it on my desktop so it was right there).
5. Continue following the Pwnage instructions, but DO NOT GET FRUSTRATED if an error message appears saying "Failed to enter DFU mode." If that appears, as it did for me, go to Step 6.
6. Close Pwnage. It has done its job because it has made that custom Restore firmware. Open Itunes while your iPod is connected to the Mac. You should see the option to Restore the iPod. Hold down "Alt" on your keyboard (It's above the "option" key on my Macbook) and click Restore.
7. At this point a browser window will appear. Guide it to that custom firmware that Pwnage 2.0 built and select it. Have itunes restore your iPod with that custom firmware. When it has finished, you will have a jailbroken iPod Touch using the 2.0 firmware.
8. If at any point your computer or iPod catches fire, know that I have so many student loans that I am practically judgment-proof from any lawsuit you might file against me.