Here's how I solved the problem:
1. Go into finder (or windows explorer).
2. Find the Album Artwork file within your itunes file (usually "computer name/music/itunes/album artwork") I noticed that I had 3 files, "cache," "cloud," and "download." The Cloud file was empty. But the cache file and download file had the exact same information.
3. Open the cache file. That should reveal a file that is identical to the file that is revealed if you open the Download file. On my system that file was "5C376133A78DCCBE" (may be different on your system, I don't know)
4. Right click your mouse over the 5C376133A78DCCBE file and select copy.
5. Go back to the Album Artwork file and open the Download file.
6. Right click your mouse over the 5C376133A78DCCBE and select paste. Let it overwrite/replace the 5C376133A78DCCBE file with the same 5C376133A78DCCBE file.
7. Go back to Album Artwork, right click the Cache file, and select "move to trash"
8. Quit iTunes (if you had it open).
9. Hold down the option key and reopen itunes.
10. Select "choose library"
11. Go "computer name/music/iTunes" and select the "iTunes Library.iti" file.
12. If you see iTunes importing the album artwork, you've done it right.
13. Test the iTunes Album Artwork screensaver and hopefully it works for you like it did for me!
MacBook Pro running OSX 10.6.8