iOS4 (iPhone OS 4) released by Apple

Among these the most important are:

• Multitasking: Now you can run your favorite third-party apps and switch between them instantly without slowing down the performance of the foreground app or draining the battery unnecessarily.
• Create playlists: Create custom playlists right on your iPod Touch or iPhone.
• iBooks: More than a great ebook reader, iBooks is also an amazing place to browse and shop for books, day or night.
• Folders: Organize apps into folders with drag-and-drop simplicity. Get faster access to your favorites and browse and manage up to 2160 apps.
• Better Mail: See messages from all your accounts in a unified inbox, organize messages by threads, open attachments in third-party apps, and more.
• Customizable backgrounds for the Home screen

Several of the features like multitasking require more advanced hardware and are therefore only available on the iPhone 3GS and 3rd-generation iPod touch.

You can use the update feature in iTunes to download iOS 4. The iOS 4 update for the 3rd-gen iPod Touch is around 366.5MB and it is 315MB for the 2nd-gen.