Here is the full instructions:
1) Hold the power/lock and home button until the iTunes logo comes up. Keep doing it until the logo pops up.
2) Now it is in DFU mode, plug into your computer and iTunes should detect it.
3) Download the 1.1.1 firmware (google it).
4) Hold the shift button and press the Restore button on iTunes.
5) A window should pop-up, now find the 1.1.1 firmware, select it.
6) Now it is restoring, after it is done, go to
http://jailbreakme.com and jailbreak your iPod.
7) If you want to jailbreak, use iLiberty+ (for Windows) or iLibertyX (Mac) to jailbreak. The website is:
http://www.ipluspwns.com
8) Have fun.