I'm now on my 3rd Itouch since December all due to the same problem. All seemed to be going well with my 3rd replacement Itouch. Having loaded most of my cd collection into ITunes the night before I was going on holiday I synced my Itouch. Some sort of automatic download took place I think from Microsoft and suggested my drivers were being updated. Next thing I got message to restore my Itouch to factory settings. I did this and all the problems I had with my previou Itouch's started again.
When I now plug my Itouch into my laptop it says "USB device not recognized" and the Itouch will not switch on. I've done everything including reinstalling Itunes, holding down the power and home key but to no avail. Looks like I'm going to have to send my Itouch back again. I have a suspicion that a Microsoft download is corrupting the drivers. If anyone can help I would be very grateful. I really like my Itouch but the fact it keeps failing leads me to wonder if I should opt for something else.
I had success with the holding down the keys and connecting to usb and using itunes to restore firmware like they show here http://support.apple.com/kb/HT1808 the showing the usb thingy on the screen part