Hello,
I have an ipod touch 64gb and also have the frustrating album art issue. I had avic 910's installed in both my company trucks and my employee has a 160 Ipod classic, his art shows perfectly.
Pioneer advertises that there artwork will "display beautifully" and is compatible with Ipod touch and Iphone. As we have all seen this is not the case.
I am 99% sure that this issue is thumbnail related and specifically determined by which ipod you're using, it seems the Ipod touch and Iphone are susceptible to this problem.
I am sure there is a way to rectify this, and if every one on this board called pioneer at 1.800.421.1404 AND filled out this form on their site:
http://www.pioneerelectronics.com/PUSA/AboutPioneer/Contact+Usthey would issue a firmware update to rectify. If you are within you're warranty period I would specifically mention this to Pioneer, as whether intentional or not, these units do not work as advertised.
And buy all means, if anyone discovers a workaround/fix, please share. Also if you all have contacted Pioneer and gotten nowhere, please let me know ASAP, as I'll probably return mine.