Ipod touch can no longer connect to XP following Apple upgrade, HELP !

This is a nightmare. My son has an ipod touch (8gb)purchased a couple of months, and it's been fine until a couple of days ago. I downloaded some music for him, and just about to synch when Apple informed me on itunes of a software upgrade, so naturally I did this. However, it could not complete it saying there was a problem installing the hardware. The ipod then had a permanent picture of a usb cable pointing towards the itunes logo. Itunes no longer recognises this ipod or my own ipod as a device.
I'm not a techhie expert, but I generally know my way around computers, however I could not resolve this.
I called the Apple technical support desk, where I spent 1 hour 45 minutes with 2 different advisors who could not resolve this. We installed and re-installed various components from drivers to itunes to anti virus software, however nothing could change. There was simply no recognition of the ipod at all when connected.It does give a pop up message to restore the ipod, however you can't actually click on the restore button because to have to get rid of the pop up message first, then the screen with the restore facility disappears.
Windows xp is continually popping up a message saying " FOUND NEW HARDWARE WIZARD There was a problem installing this hardware. Apple Mobile USB driver. An error occured during the installation of the device. The system cannot find the file specified."
You then have to click on finish, however the message keeps coming back. We kept going round and round in circles with the technical support people, where it was left that I should start removing programmes on my computer to see if any of those are causing a problem. I have had the same spyware for the last 12 months now and never had a problem before, nor any other programmes.
I booked a genius appointment at my local Apple store today where the assistant reset the ipod to factory settings so it could at least work. I explained the situation, however 15 minutes was never going to be long enough to look into it, and a restore was all they did. Obviously all of my programmes were lost, however when I got home and plugged it back into the computer again, it could not be recognised by itunes and i got the same pop up message. Luckily we have not spent alot on downloads, however my son has lost his music now and it cannot be connected or upgraded. It's under guarantee however a software upgrade by Apple has totally messed my computer up. I really don't know who to turn to now as both the service support and store has not rectified this, something I feel has been caused by Apple.
Any advice is appreciated. Thanks

Does the iOS device connect to other networks?
Does the iOS device see the network?
Any error messages?
Do other devices now connect?
Did the iOS device connect before?
Try the following to rule out a software problem:                 
- Reset the iOS device. Nothing will be lost
Reset iOS device: Hold down the On/Off button and the Home button at the same time for at
least ten seconds, until the Apple logo appears.
- Power off and then back on your router
.- Reset network settings: Settings>General>Reset>Reset Network Settings
- iOS: Troubleshooting Wi-Fi networks and connections
- Wi-Fi: Unable to connect to an 802.11n Wi-Fi network       
- iOS: Recommended settings for Wi-Fi routers and access points
- Restore from backup. See:
iOS: How to back up
- Restore to factory settings/new iOS device.
If still problem make an appointment at the Genius Bar of an Apple store since it appears you have a hardware problem.
Apple Retail Store - Genius Bar

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