Have a similar situation; album art was all there (added the correct way in iTunes) and I Manually Sync my 4G Touch. After the iOS5 update, I ‘Dragged & Dropped’ one Smart-Playlist to the Touch and then lost 80% of the Album Art on the Touch. What really is upsetting, the Art is there. Dock the iPod and iTunes show’s the Art listed and within ‘Get Info’ for the iPod.
This need to STOP, more then 10 years of using iPod without this problem and in the last two months had to reload 3-times already since getting the 4G Touch; great loss of time with a 64G. Add a Warning! or something. Maybe it’s an issue with iTunes 10.5.0.142, OS-Win-7?
UPDATE: for this scenario, I think the Art got corrupted by older Art listed in iTunes. When I fixed the 1st occurrence of missing Art, I only fixed what was on the iPod to save time (only 30% bad) and then when I ‘Sync’ed’ a Playlist from iTunes, 80% of Art then got corrupted. There are trade-off’s to both Auto and Manual Syncing. Like I said; “a Warning! would be nice” OR how about “Asking”; “Do You Wish To Overwrite The Existing Art?” ⚠