Ok, so I connect a blank ipod (wiped with ipod restore on windows). Transfer some music for which covers are present & disconnect. I have music, I have covers (about 4 Gb on 18,000 songs), life is good.
I reconnect the ipod, and transfer some more music, disconnect again. The music is there, all covers are gone. 

So once again I connect the pod, and from the ipod options I choose "update artwork". I get a shortStatusMessage "covers for 18,000 songs updated". I choose disconnect. The ipod then chugs along for a long time, and finally disconnects. Note that the average user will have _no_ idea what Amarok is doing, but with a file manager I could see it was busy loading the artwork. Except it ignores all the previous artwork files and just dumps an additional 4 Gb of covers right next to the original 4 Gb in the Artwork folder. Then it disconnects successfully.

I shut down Amarok, connect the ipod, open a file manager and wipe all files in the Artwork folder. Then I start Amarok again and choose "update artwork" again. The cover folder is repopulated after I choose "update artwork" and then do some other operation which causes the transfer cache to flush: load a file, disconnect. (as a side note: again it will only say "flushing ipod transfer cache" for the longest time and the average user will think "WTF is going on" while it bravely transfers covers in the background). In this case I disconnect. And lo and behold: I have covers again!

And of course, the next time I connect&disconnect the ipod again, *poof* go the covers.

I'm running Amarok 1.4.8 on Fedora Core 8, libgpod 0.6.0, KDE 3.5.9