Ok I just tested this procedure and I was able to revert or downgrade my iPod Touch firmware/software version from 2.1 to 2.0.2.

As of this posting, 2.1 is the latest version of the iPod Touch firmware.

First step is to open iTunes and then connect your iPod Touch to your Mac.

Your iPod Touch will now appear in iTunes.

Then make sure that your iPod Touch is unlocked meaning you can press the buttons and go to the each applications.

Press the Home button and hold and then press the Power button (located at the top of the unit) and hold.

While still holding both buttons, look at iTunes and once your iPod disappers from the sidebar, release the power button but remain holding the home button. Then your iPod will reappear on the sidebar, immediately release the home button.

You will see this notice

iTunes has detected an iPod in recovery mode. You must restore this iPod before it can be used with iTunes.

Now you’re ready to downgrade. Click on option and click on restore (option+restore), finder will open and you will have to choose which firmware to install.

The firmwares are located at

~user/Library/iTunes/iPod Software Updates

Note: ~user is the name of the your home folder

The file that we’re looking for has an extension of ipsw (*.ipsw)

If you’re like me who wanted to revert to 2.0.2, I chose

iPod1,1_2.0.2_5C1_Restore.ipsw

and then open.

That’s it. Follow the rest of the steps given by iTunes and you have successfully reverted/downgraded your firmware.