Click the "Update" button on the pop-up box to update your i Pod Touch.
The i Tunes program will direct you to the i Tunes Store, which will ask to charge your i Tunes account for the price of the 3.1 software update.
i Phone OS 3.0, released on June 17, 2009, added features such as cut, copy, and paste, data tethering and push notification support.
If you have the first-generation i Pod Touch, you must update the device's existing software to 3.1 before you can download and use applications available in the App Store.
Many of these applications were created specifically for devices that have the 3.1 software update, which include the i Phone and the second generation i Pod Touch.
According to the official Apple site, the i OS 4 software is not compatible with the first-generation i Pod Touch.
I found what I think is a first gen i Pod touch (see here).
I had to restore it and it says it cannot update beyond i OS 2.2.1, build version 5H11.