OK this isn't something that I've run into but I don't play with I Pods much either.
If you have a fully patched System it's possible that the USB Ports are being blocked by one of the recent Security Updates from MS and this is preventing the install of the software as the USB ports are not visible to the installer so it is unable to continue. You could try plugging in the I Pod and rebooting the computer and then try installing the I Pod Software but if that doesn't work the only real answer is to do a reinstall of Windows and not install the newer Security Patches that are available. There are currently several USB devices that are experiencing problems and it's more than likely that any Apple Product would experience the same problem.
I hope that is of some help but I can tell you that as of November/December last year that I could install any Apple I Pod related software without a problem but in the last few months I've been asked on numerous occasions about USB devices no longer working and while I haven't had any personal experience there have been many people who have found out that USB Devices that once worked perfectly with XP no longer work. This ranges from Thumb Drives to printers so it's possible that any I Pod products could experience the same problem.
Col
