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Generally in the itunes store under requirements it tell you that the application is compatible with either iphone, ipod touch or ipad. You should note that the ipod touch is what you seem to call the itouch.
if u cant restore ur itouch then try puttin it in the dfu mode. itunes will say there is an itouch in recovery mode. just ignore it and press shift + restore then locate ur .ipsw file and click ok. then complete ur restore process.
don't let the iTouch connect to the wi-fi network it detected automatically - try setting up a new wi-fi network from scratch.
the setup screens will ask for network name (the SSID) the security protocol (probably WPA-PSK if you are having all this trouble) and the password (pre shared key)