I've seen a lot of posts out there that say that iOS 5 causes 3rd Generation iPod Touch's to no longer function. Is this true? Is is safe to install iOS 5 on my 3rd Generation? Is there a special way that i need to do it?
You can only install iOS 5 on the 32/64GB versions of the 3rd Generation iPod Touch. The other versions are technically 2nd Generation and so iOS 5 causes seriously problems when someone tries to install it on one of those.
It is, at least in theory, possible. See the Wikipedia article for more information. Installing it the normal way should work: simply open iTunes, plug it into the computer, and check for iOS updates.
Once you do that, actually, you won't ever need to plug it in to update the system again! :)