software required for communicating with iPods not installed correctly

I notice on this last download that the download for 10.3.1 is still available on apples website. Do you think I should try that download and see if I get the same error?

Best not ... there's been library file updates for several of the versions since then, so a 10.3.1.x would most likely not be able to read your current library file.

The systemwide nature of the trouble swings focus away from strange permissions things (unless, possibly, we've got something exceptionally exotic going on with the SYSTEM account).

I think (just in case), we'd better check to see if there's anything going on related to malware.

Download and install the free version of Malwarebytes AntiMalware:

http://www.malwarebytes.org/products/malwarebytes_free

Update your MBAM definitions and then run a full scan of the PC. (Takes about 2 hours on my Lenovo.)

http://www.malwarebytes.org/mbam.php

Does the scan find any infections? If so, please paste the contents of the log file for the scan in a reply here so we can have a look.

... one last throw of the dice, perhaps. (I don't have high hopes for it, but it shouldn't do any harm.)

Perhaps running a disk check (chkdsk) over your C drive.

Windows 7 instructions in the following document: How to use CHKDSK (Check Disk)

Select both Automatically fix file system errors and Scan for and attempt recovery of bad sectors, or use chkdsk /r (depending on which way you decide to go about doing this). You'll almost certainly have to schedule the chkdsk to run on startup. The scan should take quite a while ... if it quits after a few minutes or seconds, something's interfering with the scan.

Does the chkdsk find/repair any damage? If so, does itunes launch without the error now?

Most likely the iPodService.exe usually under C:\Program Files\iPod\bin is missing or corrupt.

Just copy it from another computer (I was able to copy one from an old 32bit Vista to a 64bit Win8)

Error went away.

I had the same problem (on Win7 64-bit), and a combination of b noir's and xr911's suggestions put me on the right path.

iPodService.exe was already present in C:\Program Files\iPod\bin so I didn't need to copy it from elsewhere, so instead I tried changing it to "Run this program as an administrator" in Properties > Compatibility

The message "The software required for communicating with iPods and mobile phones was not installed correctly. Do you want iTunes to try to repair this for you?" no longer appears.

Fair enough, James. Sorry we weren't able to get things resolved.