Update your iPod Touch to the new firmware 3.0 for free, instead of updating via iTunes Store for $10. The device will be restored in the process.
Here is how you do:
- Download & Install iTunes 8.2
- Download the correct firmware for you 1G or 2G iPod Touch from http://www.felixbruns.de/iPod/firmware/
- Connect your iPod Touch to your computer
- Start iTunes 8.2 and select iPod Touch from devices list
- Hold Shift and click Restore
- Locate the new firmware file (.ipsw) downloaded in step 2
- Do not disconnect till iTunes has completed updating iPod Touch
Enjoy the new firmware, for free!