My iOS used to update before I reset my ipod 3g, but now it won't. Help?

Before I had reset my iPod completely, it was working perfectly with the IOS updating well, but after I rest it, it went back to the lowest iOS possible, and it will not let me update again since there is no sign that I should update. And now I can't download anything because everything is iOS 4.3 or higher. And I'm selling this iPod soon, to a friend and I really don't want it to not let her download music from her iTunes account like it did to me, and I also want it to actually update when I reset it again for her.
What's wrong with it? And I cant go to a Apple Store and get it troubleshooted since I don't have enough money.
It also will not let me download any music onto it.

I suspect you have a 2G iPod. Those can only go to iOS 4.2.1.
Identifying iPod models
iPod touch (3rd generation)
iPod touch (3rd generation) features a 3.5-inch (diagonal) widescreen multi-touch display and 32 GB or 64 GB flash drive. You can browse the web with Safari and watch YouTube videos with Wi-Fi. You can also search, preview, and buy songs from the iTunes Wi-Fi Music Store on iPod touch.
The iPod touch (3rd generation) can be distinguished from iPod touch (2nd generation) by looking at the back of the device. In the text below the engraving, look for the model number. iPod touch (2nd generation) is model A1288, and iPod touch (3rd generation) is model A1318.
You also said: "It also will not let me download any music onto it." What happens when you try to sync music to the iPod?

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