I too am having this problem with the 5th generation 80GB iPod.
I've followed the instructions and gone to Devices, my iPod, chosen the Music tab and made sure that the "Display album artwork on your iPod" box is checked, then I update the iPod.
(This is the default setting anyway.)
Result: Only a few of the album artwork images downloaded from iTunes will display on my iPod. It all displays in iTunes, but most of it will NOT display on my iPod. I am referring to album art provided by iTunes. I have not yet attempted to add album art that iTunes cannot provide.
Restore doesn't fix the problem.
Since I am getting some of the artwork but ONLY some, I theorize that it's an unresolved image size or format issue that Apple hasn't addressed?
Anyone have any answers?
Sony VAIO Windows XP