Donadoni is to be blamed yes, but not as most are blamming him. I would blame him for starting Panucci in the RB because he was giving nothing (I'm pretty sure that on what's left of the tournament we won't see that one), and for playing with Gattuso and Ambrossini, with Pirlo attached in the middle just in front of the defenders, playing like a pure DM. And that's it. I would have fielded the same defense, even knowing all that there is to know about both of them, those are the guys I trust the most.
And please, saying Capello or Lippi wouldn't have done the same mistakes...just give Capello and Lippi the italian NT without Totti, Nesta, and Cannavaro, with no WC defender (Chiellini and Gamberini are good, but not WC), and with the best team in Italy just fielding one italian (that is totally off form), while the likes of Juventus and Milan (that were the teams that gave more players to the NT last WC) are having mediocre/crappy seasons and with important players going through slumps. I really would have loved to see how Lippi or Capello would have handled that.
And last but not least, FIFA has to make the offside rule more clear. It's so free for interpretation, it's ridiculous.