I'd run back to the counter and get the unit replaced under warranty.
I have been using my ipod touch 16gb(running 1.1.3/4 w. software upgrade, not jailbroken) since Christmas and for the most part I love it. Today, however, the coverflow on the ipod started mixing up the album art, even though it was all correctly placed on EVERY SINGLE SONG on iTunes. An example of the problem: I am browsing through the cover flow, and I see ABBA's Gold album a couple albums away. I then scroll to this album to center it, and it reads Abba Gold at the bottom, and has all of the abba songs when viewing the song list, but the picture has all of a sudden changed to 3 doors down citizen soldier. Also, in some cases, when I select and play a song, and go back to the default upright music playback screen, it will show a different(also wrong) album art image. One way I have found that sometimes fixes the problems is to delete the album artwork in itunes, sync the art-less tracks onto the ipod, then replace the art and sync the tracks back to the ipod. The problem with this is it only works sometimes, and, over the multiple syncs i have done in the last few hours, some of them have undone themselves. Also, some change just in the cover flow and are fine in the playback screen, and some of the artists/albums were not affected at all.
Other non-related problems i have had(both fixed by a simple twist to vertical and back) are pixelated and missing album artwork. Keep in mind that throughout all of the problems mentioned in this post, the artwork on all songs in itunes was perfectly correct. Anyone else had this problem and fixed it, or seen a fix somewhere else?
Thanks in advance!