CrunchGear's Matt Hickey wrote a good how-to on upgrading your iPod touch's firmware to 1.1.2 without sacrificing the ability to download third party apps. The process is farily simple; it involves downgrading to 1.1.1 (if you're not there already), downloading and installing a program through installer.app called OktoPrep, upgrading to firmware 1.1.2 and finally running Jailbreak 1.1.2. For all the nuances, check out the post at [Crunch Gear].
that looks like the touch sitting next to me...oh and the purpose of hacking is to simply have applications that apple is too slow to put out. i personally have gotten 10 times more than i ever expected out of the purchase of my touch. i know others who have discovered the same with their iphones.