@kgassman: I think you’re mixing apples and oranges: if you’re going to let WMP manage your files, your Fuze should be in MTP mode. (Or Auto, though not everyone has success with that). If you want to handle it manually or through other utilities, then use MSC mode.
@gabe565: Yes, if you use Winamp for playing on the PC, it displays art by searching the track’s folder for %ID3_album_title%.jpg, then cover.jpg, then folder.jpg. So I have higher quality for Winamp, and lower quality for the Fuze in the same directory. The other advantage of keeping %album%.jpg files is when you make a “mix” folder with tracks from different albums, you can have multiple albums’ art files without conflicts (as you would if they were all named folder.jpg) for Winamp. Although, I suppose, you could also get this effect with a playlist which points to the appropriate directory/track. Winamp can generate playlists for you, including the option for UTF-8 encoded .m3u8 files, however I really haven’t really played with it enough to get it to work without tweaking the generated file (making it relative to the root /MUSIC directory, removing the leading BOM characters (which is a Fuze deficiency), etc.).