Jailbreaking an itouch means exactly what it's name is: Breaking your Itouch from it's limits. For example, customable theme, hidden apps, and more! You may think jailbreaking your itouch bricks it; if you know what you're doing, then this won't be a problem. So, here we go: (NOTE: jailbreaking an itouch removes it's warrenty. If you screw up somehow and brick, it is not my problem. Follow these instructions EXACTLY!)
(NOTE 2: you need Itouch gen 2, 3, or 4 to jailbreak it!)
1. To jailbreak, first you need a program called greenpois0n on your computer. To download it, go here. Download the Mac version of it.
2. Double-click the Greenpois0n zip file to extract it, then doubleclick it again to run it.
3. Connect your itouch to your computer and turn your Itouch off.
4.Click the Jailbreak button on your computer.
5. Greenpoi0n tells you to put your Itouch into DFU mode. It will guide you through the steps to do it.
5a. Press and hold the sleep button for 3 seconds
5b. Keep holding the sleep button and also hold the home button for 10 seconds.
5c. Let go of the sleep button, but keep holding the home button.
6. the Itouch is now in DFU mode, and Greenpois0n is now jailbreaking it. Keep holding the home button.
7. Once the jailbreaking is complete, release the home button(The prompt on your computer screen will say so)
8. Click the Complete button to close Greenpois0n.
9.Your Itouch screen will show verbose text scrolling down rapidly. this is completly normal, so don't worry.
10. Your Itouch will reboot.(Notice the new cool Apple symbol when it's starting up?)
11. A new app will appear on your Itouch named, "Loader". Open it.
12. Once opened, there will be an app available to install that will say,"Cydia".
13. Once you downloaded Cydia, uninstall the Loader app, you will no longer need it.
14. Enjoy your jailbroken itouch!

---

What to get from Cydia:
(Search these apps, and then download them)
-Installous
[Allows you to search any app, and download it FOR FREE. it will take some time, depending on the size, but that's a reasonable trade-off]
-MxTube
[Allows you to download Youtube videos, and watch them whenever you want. And you don't need Internet to watch them.
-Winterboard
[Allows you to customize your Itouch in themes. You can get themes from Cydia. Look for the Theme catergory in,
"Sections".
And that's pretty much it.
Enjoy!
REFERENCES:
http://www.iphonehacks.com/2011/02/how-to-jailbreak-ipod-touch-4g-ipod-touch-3g-on-ios-4-2-1-using-greenpois0n-mac.html