I don't know how to tell. It says 8g on the back and in itunes it says i have version 1.1.5 but when I check for updates it says that is the latest version.
As I though, you have a 1G iPod and you have to update the iOS to use apps. It is a paid update. The following says how to get that update. You may have to use a different browser to the the sublink to work properly.
http://support.apple.com/kb/HT2052