Q: how do i upgrade my ipod touch generation 2 to ios 4.0?

Connect your iPod to your computer and turn on iTunes.  Select your iPod from the menu on the left.  It will show you the latest update and you will press update.

I gave you the easy directions. Or you can read apples longer explanation that says the same thing here.     

http://support.apple.com/kb/HT1483

I believe 4.2.1 is the last update for 2gen iPod touch.  There are no more updates

Silly question but are you sure it is a 2nd gen touch?  Because the 1st gen iPod touch doesn't go to 4.0

On the back of your iPod there is a set of numbers and letters

Like this:   A1213

What does yours say?

Go to this link and find the picture of your iPod

http://stateofjailbreak.com/what-device-do-i-have/

Don't worry it's just to see the picture.  Has nothing to do with jbing

Does that mean its a 1st gen?

Aw man, I'm sorry. Where did you get it from