I first purchased a iPod touch 2G around this time last year then a iPod touch 3G about a week after the launch. I have also had a iPhone 1G and I got a iPhone 3GS January.
When I got my iPod touch 2G I used it and the Sort Artist field inside of iTunes worked perfect on it so if I had a artist named "Delerium feat. Jaël (of Lunik)" it would be put into the artist group "Delerium" without taking an extra artist field so if I wanted to play a specific artist I could just go to it and it would play them all no matter what the original artist field name was.
Ever since I think the 3.0 update Sort Artist and Smart Playlists are useless and it is starting to get on my nerves. My Top 25 smart playlist shows a random grab of the least played and I have over 200 artists when it should be much less.
I find it sad that the Remote app looking at your iTunes library shows it perfectly unlike the iPod or iPhone.
When this first happened I tried downgrading back so I could get it the way I wanted but I could never get it the same again. Once they broke it I was stuck. I tried every possible combination of iTunes versions and Firmwares and came up with nothing.
Does anyone here know of a fix for the Sort Artist and Smart Playlists?