It does it for any kind of MP3 as long as it's properly tagged. You do need an iTunes account for it.
One of the drawbacks is that if the song isn't in your country's music store, you won't get the artwork. You can still put it manually but it won't be the nice quality ones iTunes supplies.
As a side note, I don't think the artwork is 'hard' embedded in the file.
iTunes attaches it for your iPod, iPhone, Cover Flow and Front Row but the artwork doesn't follow the MP3 file if you move it to other devices or outside iTunes.
You can force embed it using a program that I can't remember right now.
If you're using a Mac you can download an Amazon iTunes widget where you type in the album or artist name and can just click "Set as album art in iTunes"
awesome for those of use who are anal about our info or like Coverflow
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