OK. So I downloaded IPhoto, and although it showed the photo thumbnails for the directories (2006, 2007, 2008 photos etc) when you looked inside again although it showed blanks for the photos, no photo content. I then tried to look at the camera roll of photos taken with the IPad yesterday, and the software crashed.
So....I deleted all of folders and re-synced with ITunes but only 100 photos this time. They looked great, so I increased to 300 photos....and they look fine.
My conclusion is that when it sync's, its either sending over a low res version first to set the structure and then updates with a high res version once the entire package being synced is known and because it took so long it must have gone into sleep half way through (i left it syncing when I went to bed last night). or it adjusts the degree of compression depending on how many files you are looking to transfer rather than limiting the number of files. FYI the family photo archive back to 2006 was 6000 photos. I'll now try adding these a folder at a time.
It does sound a bit like the old windows joke about turning everything off and on again, but it did fix it it seems.
Any further thoughts? (ps is there a way of selecting folders at different levels within several folders or is it just whole folders selected at same level in ITunes photo sync? For instance I hold everything by year, and by season within year, but there is also a folder for "best" in the year which is a duplicate of my favourites - I want all seasons in the year, but not best, and each year folder 2006-2012 )
Thanks all for your help