You say your iPod indicates how much space is used by images? There is nowhere on the iPod to tell you specifically how much space is used by album artwork - you can see space used by audio, videos, photos, and other (in the Settings > About screen in the iPod).
You also mentioned the split screen (menu side and "images" side). This is not coverflow, this is the main screen. Coverflow is a specific screen that allows you to scroll through all of your albums and select by cover (found by going to Music > Coverflow).
Can you see the artwork for each of your CDs in iTunes - I mean is the artwork shown with each of the albums? Does coverflow work in iTunes? If not, then the artwork was not added correctly. It actually sounds like you added the artwork as separate images and not as part of the tracks or albums.
Here is a link that give the basics of attaching artwork to songs.