Here is a basic step by step that might work. YMMV, as I did all of these things in various order and I am not sure what ultimately made the difference. One interesting thing - when my iTunes was formerly working, my iPod Touch would be recognized as a camera by XP. However, when I upgraded to iTunes 10, it stopped being recognized this way. I suspect some driver update occurred, and this might have been the source of my problem. I disabled the Apple drivers (Step 3 below) and now my iPod is recognized as a camera again and all seems good.
1. Uninstall iTunes 10
http://support.apple.com/kb/HT1925
2. Install iTunes 9.2.1.5
3. Rename and add a ".bak" extension to all of the files here:
C:\Program Files\Common Files\Apple\Mobile Device Support\Drivers
4. Put the iPod Touch into "recovery mode" - not sure if this is necessary
http://support.apple.com/kb/HT1808
5. Synch the iPod touch with iTunes. Note this was not working for me in XP after recovery mode, but I was able to sync with a Vista machine. After that, it was visible in XP as well.
6. Once you see it in iTunes, right click on the iPod in the left pane of the software and "Restore from backup." Note that my most recent backup seemed corrupt, but I was able to restore from a slightly older version.
Again, I am not sure that all of these steps are necessary, but this is what worked for me.