How to update iPod touch from iOS3.1.3
If it says you're on the most recent version with no updates available, it's either jailbroken and specifically modified, or there isn't an update available for your device.

If you have an iPod touch 1st-generation, iOS (or iPhone OS) 3.1.3 really is the latest version you can install on your device, and will show that there are no updates available.