You MUST put it into DFU...

Connect it to your computer (turn your speakers on), you will hear a beep (windows xp recognizing it, even if it's on the loop)... it's ok.

Press both buttons, It will turn-off the screen, after the screen goes blank you should wait 2 ou 3 seconds and you will hear a beep from you computer (telling that the device is off) so now you RELEASE the power button (the upper one) and keep holding the other button (the bottom one), after 10 seconds you will hear beeps again and itunes will recognize it in DFU mode.

That's the way I do it, it works flawlessly. If you don't guide yourself from the beep it may be tricky to put it into DFU because you need to wait 2 ou 3 seconds AFTER the screen goes blank to release the power button.

Try that, it WORKS.