so after reseaching this it appears Apple has tricked us. If you have an 8gb Ipod touch 3rd generation
it is really a 2nd generation software sold as 3rd generation. Only the 32 GB or 64 GB have the true 3rd generation software and only those can get updated to IOS5.
To help identify :
The iPod touch (3rd generation) can be distinguished from iPod touch (2nd generation) by looking at the back of the device. In the text below the engraving, look for the model number. iPod touch (2nd generation) is model A1288, and iPod touch (3rd generation) is model A1318.
I bought mine 8gb Ipod touch 3rd generation direcclty from Apple and only find out now that it is really a 2nd generation.
Shame Apple!!