I did a test on this several months ago, by attaching the same artwork at different resolutions. The result is that the .jpg file is added into the the .mp4 file as is - no compression on the data seems to be going on, judging from the differences in file sizes. There is definitely good reason to keep your artwork small, but not so small that the iPod has to upsample it to display (you'll get a blurry/pixellated image in that case). I keep mine all at 180x180. Since the new video iPod has 240 lines, it may be good to go a little higher. But some images you get off the web are big (and have other problems as well), so using automatic artwork loaders will work against you in this case. Personally, I don't mind spending a minute or so (while the CD imports) to clean up the image before I add it to the songs.