How to put an ipod touch into restore mode: Plug it into your computer, and turn on iTunes, then: hold the power and home buttons down until it resets. Release the power button, but keep the home button held until it enters recovery mode.
How to restore to a specific version of the firmware that you have downloaded to your computer: Use iTunes but instead of just clicking the "Restore" button, you hold the shift key down and then clicking the "Restore" button. This gives you a file selecton dialog that you can select a specific firmware file on your local hard drive. NOTE: You can also "upgrade" to a specific firmware version in the same way, but shift-clicking on the "Upgrade" button. At some points the difference between a Restore and an Upgrade is very important! (e.g. after jailbreaking a 1.1.1 and running OktoPrep, you should UPGRADE to 1.1.2, not restore!)
VERY IMPORTANT: Turn off "Auto-Lock" in the General->Auto Lock control panel!!! You will have to do this every time you upgrade/restore to a new firmware. Nothing messes up a firmware upgrade like the ipod locking halfway through it and turning off!
Here are a few guides that I found to be the most useful for jailbreaking/hacking the ipod Touch: