More info:
I FINALLY upgraded to iOS5 today, along with the latest version of iTunes, so now I have to commit to using this plugin. Although I didn't need it at the time, I previously had the plugin working fine with iOS4 and an older version of iTunes10. The version of MM is the same.
I made sure to delete the previous version of the plugin from the Plugins folder, then installed the latest one.
This is what happens when I sync:
1) In MM, I have set the plugin to autosync 1 playlist - "iPhone" with ~200 mp3s in it. The plugin frontpage bar (after clicking Apply) shows there is 1.2GB of audio To Sync.
2) I start iTunes manually, if not already running. I've deleted all existing playlists in iTunes.
3) I hit Sync. The MM statusbar says it is preparing the file list. Then a pop-up box tells me folder MMiTunes doesn't exist, and asks to create it. I hit Yes.
4) The status bar shows progress of the ENTIRE ~200 songs being "copied" - takes a minute or so. I can see a MMiTunes folder appears in My Music - this contains a revolving list of 5 or 6 files at a time appearing and disappearing. At the end, the folder itself disappears.
5) A poppup in MM tells me an album art jpg in an album folder in My Music already exists and ask if I want to replace it. I hit "No To All".
6) Another popup tells me "An error occurred while moving..." that jpg and asks if I want to try again. I hit "No".
7) The same as popup from 6 appears again - for another jpg. This no doubt relates to each the TWO mp3 which have actually synced over (see below). I hit "No" again.

9) iTunes now contains a playlist called "iPhone" under a "<MM>" folder. This contains only 2 songs (which, by the way, say they can't be located if tried to play in iTunes.)
10) The d_itunes plugin device in MM now has "Library" and "Radio" subfolders. The "Library" subfolder has a "Playlists" category which shows ~23000MB (the size of my iTunes library, which is not up to date with my 60GB MM collection). Under the "Playlists" category is a <MM> folder containing and "iPhone" playlist with 2 songs in it.
I've read this entire thread, and the plugin FAQ file, and I don't see any mention of this problem. I've obviously also restarted MM, iTunes and my PC numerous times.
What's going on?

Acer Aspire 5738 - Core2Duo T6600
4GB RAM
Windows 7 Home Premium 64-bit
MediMonkey Gold 4.0.2.1462
iTunes 10.5.3.3
ditunes4.dll plugin 4.0.3.2238
iPhone 4
iOS 5.0.1