Spheres, if all else fails, try this.
Uninstall the desktop application. Install it again from kobobooks.com/apps. You will at some point in the process be offered the 3.0 desktop. Take it.
After all your books are on the new desktop, do a factory reset of your Touch. Leave the new desktop open. Wait through the whole process. Follow the directions on your Kobo for starting the device up. Plug in via USB (remember the desktop is still open). Do the waiting game as the update to your Touch loads onto the device and the books transfer.
Hopefully someone else will chime in with a less labour intensive solution. It may just be that the drivers for the Touch failed to load.
Taming Goes Rogue