Similar problem. My 5th gen ipod was corrupted and told me to reset everything, so I resynced all 7000 songs. It works fine, but no album art. Most of the 'answers' I've seen for this problem are about resyncing all your songs, which I've already done. Or uncheck-check the "show album art on ipod" in iTunes, but the newer versions of iTunes do not have this ability anymore...at least not that I can find.
I suspect there is something about iTunes 10 that just doesn't want to sync album art on the older iPods and there will not be a good work around for this unless Apple releases a fix. If anyone hears more about this, I'd love to hear it. Many thanks in advance.