VLC4Iphone But I'm not sure that it is fully compatible to iPod Touch 2nd Gen. But this .app can support firmware 2.1, you can upload via SSH or convert to (.IPA) dragging the folder (.app) to itunes. Maybe your ipod touch needs to be jb first, I'm not sure. Anyway, enjoy! Can play all video formats that vlc support.
*will stutter a bit while playing mkv (maybe in HD resolution).
Installation guide:
Make sure your iTouch/iPhone has 2.0+ firmware!
I'm using WinSCP to SSH...
This version supports streaming!!!
1. SSH into your iTouch/iPhone
2. Navigate to /private/var/stash/Applications.xxxxxx (random letters and numerals where "xxxxxx" is)
3. Drag and drop vlc4iphone.app into the Applications.xxxxxx folder
4. Set the vlc4iphone.app folders premissions to 777
5. Set all the files inside of the vlc4iphone.app folder to 777 (Just press control A to select all instead of one by one)
4. Restart your iTouch/iPhone
5. SSH into it again.
6. Navigate to /private/var/mobile/Media/vlc4iphone and drop your vids into it.
7. Your done!!!