Requirements:
Windows XP or Vista (Mac an Linux users, please test)
A Jailbroken iPod Touch with 2.2.1 software (Have not tested previous versions)
The MobileInstallation patch installed
iTunes
An app from the Apple App Store (any App will work, paid or free)
WinRAR (for fixpng as it is in RAR format)
fixpng for Windows Send big files the easy way. Files too large for email attachments? No problem!
Time, and a brain.

1. Find the app you would like to use. To do this, open iTunes, select the Applications tab on the left, and find the application. For this tutorial, I will be using iBowl, a free application. Right-click the application and press show in Windows Explorer.


2. Once it shows the IPA in Windows Explorer, copy and paste it to your desktop.


3. Now, change the extension of your application (on your desktop) from .ipa to .zip. A prompt will show up asking if you would like to change the extension, say yes.


4. Open the zip archive, and extract it to your desktop. If not already place all of the contents in a folder with the same name as your ipa. (If it is corrupted, you did not change it correctly. Try changing your Windows folder options to show file extentions in name, so you can just rename it like I did.)


5. The folder should contain 3 items: Payload (folder), iTunesArtwork, and iTunesMetadata.plist. This varies for some applications, some do not have a iTunesMetadata. Open the payload folder, then the .app folder to see all of the various images and sounds used. You can edit these, but I don't suggest it because it might screw up the app for you.


6. For this tutorial, we are going to edit the icon.png. This is the icon for the app that shows on your iPod on the home screen. If you try opening the file, it won't work because it is in the "iPhone PNG format". Obviously, you can convert it to proper Windows with fixpngwindows, which you downloaded from the requirements. Place icon.png in the png folder of fixpngwindows. (copy and paste)


7. Run iPhoneFixPng.exe and press convert. A prompt should appear saying the conversion was successful.


8. Now the png file should be viewable. Just take it in paint and change it however you want, but don't mess with the dimensions, or it will cause major problems. For the tutorial, I am putting a simple smiley face on it.


9. Copy and paste this file to the Payload/appname.app folder. If it asks to overwrite, say yes.


10. Now you are all set to run it on your iPod. Make a new zip archive and put Payload, iTunesartwork, and iTunesMetadata.plist in it. Name it exactly what it was before. For me, it was "iBowl 6.0.zip".
http://img190.imageshack.us/img190/3453/tutpic10.png

11. Rename the .zip to .ipa this time, and double-click the .ipa. iTunes will open and it will ask to replace the existing app. Press "replace" and it will go into your library.
http://img41.imageshack.us/img41/186/tutpic11.png

12. Uninstall the app you edited from iTunes and sync the iPod. Now reinstall it from iTunes and sync the iPod. (If you do not have the MobileInstallation Patch installed, this step will not work.)
http://img190.imageshack.us/img190/9913/tutpic12.png

13.. Browse your iPod and you will see your edited app. Congratulations!
http://img39.imageshack.us/img39/6810/tutpic13.jpg

Please post questions or concerns here