You have helped mate, you've made me think! I got as far as selecting "add folder" in iTunes, got the drop down list and selected the folders on the ipod as a "USB mass storage object". Then I wanted to add but iTunes only recognises the first song in each folder, surprise surprise, come to online store please? I think not!
What might be an idea is if I add the songs from USB device via Windows Explorer directly to Documents and Settings/Owner/My Documents/My Music/iTunes/iTunes Music, then add folder to library from Hard Drive! This should work. Thanks for the headshake IH8PunkRok, Peace.