Exactly this same problem has occured to me. Sunday evening 17 Nov 2007, when I connected my touch, iTunes proposed to update to 1.1.2. I clicked ok. While the update was downloading iTunes then proposed a new version of iTunes. I clicked ok to this also. The Touch software downloaded and began installation. During the installation, the installer crashed, adn iTunes froze! Now when I try to reinitialise, I get an unkown error 1604 (after about 10 minutes).
I bought this iPod Touch in texas 2 weeks ago, and was in France when I downloaded the update. Is it possible that apple is so malicious as to kill iPods if you cross a border?