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If you have an iTunes account and are logged on when you rip the CD onto iTunes it will try to find the cover art from iTunes.
If it does not exist there then you need to go get it from somewhere else and drag and drop it onto the track
If you buy from ITMS then it has the cover art embedded.
The cover art embeds itself as part of the AAC file so there are no other files there. MP3 need a separate folder on iTunes and I guess it is recreated on the iPod.
Unfortunately the selection of covers available via iTunes is crap I know that I listen to some really obscure stuff but I do have some mainstream albums on my nano and many of the covers cannot be found. Maybe it's a copyright thing.