vanhalen26 - seriously, what I have found on this board is that the "experts" here are working with rose colored Apple glasses. They are not Apple representatives at all, and they will pounce you if you say anything contrary to Apple products. (see the incoming link at the bottom of this post).
I decided to give up another morning to give this whole project a final chance.
I finally cleared mine to factory reset, and started it as new as well. In addition, I started a completely new library for the new iTouch as in this guide:
How to use multiple iPhone, iPad, or iPod devices with one computer - Apple Support
I now have to open iTunes by holding the shift key while opening to select whether I want to update my old iTouch vs. the new. Working so far, but I have to reinstall my apps on the new Touch as well. Kind of a pain in the *** if you ask me.
So far so good. Tomorrow I will add new music to the new library and update the new Touch. We'll see if it still keeps what I have added to it from previous.