Q: How can I update my ipod touch?

To update

The Settings>General>Software Update comes with iOS 5 and later.

Connect the iPod to your computer and update via iTunes as far as your iPod model allows

iOS: How to update your iPhone, iPad, or iPod touch

A 1G iPod can go to iOS 2.2 via iTunes and iOS 3.1.3 via

Purchasing iOS 3.1 Software Update for iPod touch (1st generation)       

https://buy.itunes.apple.com/WebObjects/MZFinance.woa/wa/touchLegacyLandingPage

A 2G to 4.2.1. Requires iTunes version 10.X. If a Mac it requires OSX 10.5.8 or later. With OSX 10.4.11 you can only go to iTunes 9.X which gets you as high as iOS 4.1

A 3G to 5.1.1  Requires iTunes version 10.5 or later

A 4G to 6  Requires iTunes version 10.7 or later. For a Mac, that requires a Mac with OSX 10.6.8 or later

Identifying iPod models

I also have an iPod touch 2G.  The maximum iOS is 4.2.1.  iTunes can get you there but you can have a very hard time finding compatable software for a 2G touch.

I wrote an app just for your type of problem,

Vintapps info/support:  https://www.facebook.com/VintApps313

For a web based method see,

https://sites.google.com/site/appleclubfhs/support/advice-and-articles/finding-a pps-for-older-devices

Although I wrote my 99 cent app specifically to help solve this problem, I need to add that "I may receive some form of compensation, financial or otherwise, from my recommendation or link."

Once you update your device to the maximum, ios 4.2.1, you will have thousands of apps to choose from.  They will definitively not be the latest greatest though.

Updating the device and passing the older model to another is still the best choice.