I'm having trouble updating to IOS 5 with my 3rd generation I touch.

It won't even ask me if I want to update to the nnext version of sofware, I tried to check for updates myself by clicking the button in my Ipod section but it says instantly that 4.2.1. is the latest version. I've tried restoring my Ipod and restarsting my computer but that doesn't make any difference. Sometimes it will come up with a loading bar that says it's checking for an update and it will load for a abit but then it comes up with an error message that says "The Ipod software update server could not be contacted" and it tells me to make sure my network settings are connected and active. Does anybody have any help or a solution to my issue?

That information is incorrect.  Apple did in fact make an 8GB iPod Touch 3rd Gen.  They eliminated the 16GB from the lineup that generation, but not the 8GB.
Proof, unless CNET reviewed a one-off unit: http://reviews.cnet.com/mp3-players/apple-ipod-touch-third/4505-6490_7-33770781. html
And the dozens of sites selling refurbed and used units are incorrect too. 
EDIT: Looking into it, the 8GB was marketed as a 3rd Gen, but didn't have the upgrades of the higher capacities.

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