Obviously, DLink has not been much help at all. I'll tell ya what I found out.
The problem appears to be with the server software and firmware 1.05. I gave up on Dlinks server software, and I am now using Windows Media Player as the server. (Since there is no way to return to firmware 1.04 (without hacking it). With Media Player as the server, the album art shows up properly now.
It's seems a shame that these software and firmware releases are not tested fully before being released. I do like the DSM-520, but I am disappointed in Dlinks support of their software.