Ok, did the upgarde to iOS 5.0.1, and just like 5.0 it ran into problems doing the update and I had to put my Touch into recovery mode. Talked a bunch to Phil at iPod Touch support. The initial sync didn't really improve on anything, but Phil suggested turning off the 128k conversion option and making a small playlist to sync from as a start. That worked ok and eventually I ended up checking off most of the genres and playlists that I originally had (but did not choose the "fill empty space automatically" option). It took 3 syncs but they went much faster of course without having to do conversion, and did copy everything over.
So I don't necessarily see any evidence that 5.0.1 made a difference, though it's hard to tell. But turning off the 128k conversion does seem to have helped. It's unclear how that helped - is simply being able to go faster on the copy avoiding some kind of timeout or other issue?