All the time or occassionally? I've run into times when playing an album the album art will be working and when it goes to the next track it will switch it to the generic genre art (sometimes for just a song, sometimes for the next couple or few, and then it returns). Weird thing is I can play the same album at another time and album art works all of the way through for every song at that time. Indicates to me an MFT problem and not the iPod/metadata on the iPod (120gb classic) as it just seems to lose the ability to bring in the album art sporadically.
I know this doesn't help solve your problem. I'm just adding it to confirm that I have seen the same behavior between iPod/MFT in v3.5.1, just apparently not to the extent you are. Only advice I could offer is stuff you already tried (turn the Gracenote stuff off, reformat/reload iPod). Have you forced a reindex through the menu as opposed to just allowing it to happen after a reset of MFT or reload of the iPod? I've done one that way since I got 3.5.1 and I noticed it took significantly longer than a typical one initiated automatically through the system but I also had my Nav screen up during it and that was before I had discovered how much having the map up slowed down the process so I can't really say if it was longer because of that or because forcing one manually might be more thorough.
.......here's a lockpick. It might come in handy if you, the master of unlocking, take it with you.