Why can I upgrade my mc086bt (iPod 3g) to ios 5? it says I have the current version

You probably have a 2G iPod and those can only go to 4.2.1. If 8 or 16 GB it is a 2G. A 32 GB can be either . To identify yours:

Apple - Support - Check Your Service and Support Coverage

or

Identifying iPod models

I'm having the EXACT SAME PROBLEM.

Also, Googling mc086bt shows it is an 8G 2G iPod.

this has annoyed me. i really wanted iso5 but apparantly my ipod touch is a 2g when i bought it as a 3g. what going on there.

What is going on is that the dealer from whom you purchased the iPod erroneously identified it as a "3rd-generation" iPod, something which some dealers did when Apple started shipping the 2nd-gen hardware with iOS 4. Apple never made any 8GB iPod touch models with the 3rd-generation hardware and never referred to the 8GB models as being 3rd-gen.

Regards.