Alright it seems everywhere you look theres a person having trouble with their ipods, hell even I had a ton of trouble.
Soo I thought I would post this and ill edit it as more info comes along so please if anyone has stuff to add please add it 
ok so where to begin.
Your ipod not connecting?
Have you connected the USB AND yellow, red, and white RCA's to the back of the unit?
Did you go into the audio devices menu and select Input 1 = ipod?
Have you updated your Ipod to the newest version? How do I do that
Well in Itunes (Man I hate Itunes) if you click "your Ipod" (your being whatever you named your ipod or just click the little ipod sign on the left hand side under devices) and you will see version and under version in the main screen you will see UPDATE if you dont see update then your good to go. While your there click upgrade
I want to update my Ipod touch to version 2.0/2.1, but they want me to pay! How do I get it for free?
Well im not promoting you download this but if you do look below.
Now if you need to update to Ver. 2.0 or 2.1 then you need to follow these instructions below:
So first thing you ned to do is download the upgrade that would have cost you $9.99 US HERE -> http://dl.btjunkie.org/torrent/Ipod-2-0 ... ad.torrent
Its a torrent, so if you dont know how to use a torrent, then google it.
After you download it your going to disconnect from the internet, open up Itunes, plug your Ipod into your computer and wait for it to load up.
Once you see your ipod in Itunes goto your Ipod (see above to find "your" ipod) then hold shift + Alt then click UPDATE
It will bring up a window and you need to find the file you downloaded and double click it.
Boom it will take 5-10 mins to update and your done, usually this is the connection problems with Iphones or Ipod touches.
When installing:
-make SURE your off the Internet
-Make sure you have about 1 gig of space on your pc
-When your in Itunes, hold shift and alt and click update, choose file with update and wait about 5-10 mins for the update to complete
Brad 
EDIT: Of course I take no responsibility if you fry your Ipod or whatever. Iv done 4 ipod touches first gen and second gens and they are great so if you fry one, I donno what the heck your doing.