1.Close iTunes
2.Plug your IPOD
3.Type devmgmt.msc on Command Prompt (Device Manager)
4.Goto USB Serial Bus Controller and delete Apple Recovery (iBoot) USB Driver
5.Download a older version of update from
http://forums.macrumors.com/showthread.php?t=393427
Plug your iPod Touch
<< Windows should start with New Hardware found>> Message
6.Start iTunes now
It should come back with the ever familiar restore message
Press Shift & Click Restore
Browse to the recovery file *.ipsw
You should be up and running.
I have used these steps no less than 20 times now and seems to be working on
Windows XP SP2 machines.