I have the same issue. My situation appears to be Kaspersky Internet Security 2009 stopping itunes from working. Disabling the Kaspersky allowed itunes to recognize my iPhone. If your not using Kaspersky you might try disabling your anti-virus software to see if that helps.
Installing a full version of Windows XP SP2, and reinstalling iTunes, iTunes won't recognize when I plug the iPod in to upload music. iTunes itself functions fine (converts music files, etc). The iPod recognizes that it's being connected to something, but after a while it stops trying to transmit information as I guess there is no response. I use an external USB card. Any ideas?

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