You will need a USB flash drive or some type of external storage device for this.
Here is what you need to do:
1. Click "Start"
2. Click "My Computer"
3. At the top of the "My Computer" window, click "Tools", then "Folder Options".
4. While in the "Folder Options" window, click the "View" tab, scroll down to where it says "Show hidden files and folders", and click the bubble/check box for that item. Click "Ok" at the bottom to save the change and close the "Folder Options" window.
5. Using Windows Explorer, navigate to this folder: C:\Documents and Settings\"The user name that downloaded the iPod Touch upgrade"\Application Data\Apple Computer\iTunes\iPod Software Updates
6. In that folder there should be a file called "iPod1,1_2.0_5A347_Restore.ipsw". Copy that file to your USB drive.
7. Plug the USB drive and iPod Touch into your iMac and start iTunes.
8. Click on the iPod Touch icon in iTunes.
9. In the iPod info window, while holding down the "Alt/Option" key and click "Restore". A navigation window will pop up. Navigate the the file "iPod1,1_2.0_5A347_Restore.ipsw" on the USB drive, click it and chose "Ok". The iPod should begin upgrading.
*Very Important*
Do not unplug the iPod for any reason (well, maybe if it catches on fire

). It can take a long time to upgrade (over 10 minutes), and may even look like it is frozen, but do not unplug the iPod. When it is finished, resync the iPod and you should be good to go. Save a copy of the 2.0 Upgrade file somewhere. You can use it on both PC's and Macs, so it's a good idea to keep a backup in case your hard drive were to crash or you got a new computer.
Let me know if you have any questions and how it works out.