If you actually do have a 2nd generation Touch, it can be updated to iOS 4.2.1. A 2nd gen Touch will have Model No. A1288 etched into the back casing.
If it's a 1st generation Touch, that can be updated as far as iOS 3.1.3.
See http://support.apple.com/kb/HT1353 for further help in identifying your model.
For all models, if you connect the iPod to your iTunes Library and look on the Summary pane, there is a Check for Updates button. Click on it; iTunes will tell you if there is an update for it.