4GB iPod nano will NOT update or restore

I have iTunes 7.0.1 and a 4GB iPod nano (2nd Gen) on Windows XP SP2.
When I plug it into my computer, it appears as a removable disk (even though "Enable Disk use" is unchecked). When I load iTunes, it does not recognise it.
If I then quit iTunes, eject the disk through Windows Explorer and stop the iPod service (via My Computer > Manage > Services & Applications > Services or via Task Manager), then reload iTunes, the iPod service starts again and my iPod appears in iTunes. Great.
However, if I then go to update the iPod with the new 1.0.2 software, once it starts to update, something ejects the iPod and the progress bar in iTunes just sits there. The iPod has been ejected and will never update. I cannot restore it as it does exactly the same thing.
I've just paid good, hard cash for this iPod nano and I can't use it?! Why oh why did Apple put the iPod updater software INSIDE iTunes??? That's a recipe for disaster, as can be seen by the multitude of posts on this topic in these forums and elsewhere on the net.
Before you ask, yes I have tried all the USB ports, yes I have tried other computers, yes I have stopped all anti-virus software, yes blah blah blah. I keep getting error 1415.
I'm really narked off with Apple about this. If they cannot provide a working solution, then it's going back to the store and I'll get a Zune... (that's a joke by the way...)

SOLUTION
SOLUTION
I had the exact same problems before, iTunes doesn’t recognize iPod after connecting it, I had to use the restart iPod Service method to get it working.
I tried this on my second computer and it worked perfectly, iTunes recognizes iPod every time I plug it in.
I compared the process/services opened in both computers, and I turned on some services which were previously on disable(excluding iPod Service). Unfortunately I forgot which services it was, so I took some screenshots and compare these with your services.
After modifying the services, I tried plug and unplug the iPod several times without closing iTunes, iPod was instantly recognized by iTunes every time!
I attached the links to screenshots of my automatic services and manual services, ignore the service if its not on your list!
For those don’t know how to open Services, Start -> Run -> “services.msc”
http://img214.imageshack.us/img214/6200/automaticservicesec2.jpg
http://img216.imageshack.us/img216/3700/manualservicesce3.jpg
-If anyone know the specific services required to be turned on, please reply in this thread.
-I am using the 2nd Gen Nano 2GB version with latest iTunes.
IBM T43 Windows XP Pro
IBM T43   Windows XP Pro  

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