Just a guess, but the iPod Touch uses AppleMobileDeviceHelper to connect so it might be worth going into Security essentials>>Settings and excluding:
Under Excluded Processes.
If that's not it, I guess some other exclusion might help but I don't have any other suggestions at the moment.
Thanks for the suggestions, however I have already tried that and it had no effect. I've put in exclusions, and even went so far as to disable the MSE service and still have the issue. The only thing that corrects it is uninstalling MSE completely.
This USED to work fine until I updated to iTunes 10.2.2 a couple of months ago...that release seems to be when it broke.
I've even went so far as to completely reload my PC and it will work perfectly until MSE is installed....then no luck.