I have had this issue on my MacPro ever since upgrading to Lion (although it is difficult to pinpoint exactly to the initial upgrade to Lion - may have been a Lion update).
I am currently running Lion 10.7.5 and iTunes 10.7 (64 bit) on a MacPro 1,1. My iTunes library is (and always has been) on an external FW800 drive, and the location is specified in the Preferences->Advanced setting in iTunes. I have had this configuration for years without any issues.
Whenever I add a new album to iTunes, I manually add the artwork to each song, so that the artwork is embedded in the file. Once the artwork was added, the file icon (e.g., right click -> Show In Finder) would change from generic to the actual artwork itself.
However, now, all of the icons for music files (e.g., mp3's) in my music library have a generic icon rather than the album cover art, even though the cover art is embedded in the file. I have no problem seeing the artwork in iTunes, but when I look at the file in Finder (and Get Info) it has a generic one.
I copied several mp3's from my iTunes library onto a flash drive and opened the flash drive on my wife's computer (MBP running Lion 10.7.5 and iTunes 10.7), the icons appears in the Finder window as expected. Furthermore, I enabled file sharing on my computer and opened my iTunes library from my wife's computer and the icons appear normally with artwork.
I must therefore conclude that the issue appears to be one in which the Finder on my MacPro has some configuration issue which is preventing it from displaying the finder icons with artwork. I tried deleting the com.apple.finder.plist and com.apple.desktop.plist as well as the com.apple.finder and com.apple.iTunes cache folders, with no improvement. I also note, though not sure if related, occassional "ghost" icons on my desktop and some random finder windows (esp. shortcuts).
This is not a major deal for me, since the icons work in iTunes (and get synced properly to my iPhone/iPad), but I would like to know what is going on and how to remedy it, since it clearly is improper behavior (based on comparison to my wife's computer, which is running the same OS). I know other threads have addressed this issue, but reading though them has not provided a solution for me.
Ok. After some more research, I believe I have found the answer on another discussion thread. It appears that, at least in my case, the issue of non-displaying music file artwork icons in Finder is linked to another apparent "bug" - that of the iTunes artwork not appearing in the Screen Saver preferences. I checked on my computer and indeed I have this problem, too (but didn't realize it since I don't use that particular Screen Saver).
Someone found that the solution to the iTunes Artwork Screen Saver issue was to identify and delete all Voice Memo files in iTunes, then quit iTunes, and finally, restart iTunes. I tried this to see what would happen (I had about 8 Voice Memo files in iTunes from a few years ago). In an instant, without any reindexing, both problems were gone! Not only did the iTunes artwork reappear in the Screen Saver, but all of the iTunes music files (e.g., mp3's) now properly display the artwork icons. Truly amazing. I would have never guessed this and I'm not even sure why it caused the issue in the first place. Kudos to SjSmith001, who stumbled onto this solution (even if inadvertent)!
I actually was able to add the voice memos back to iTunes, and everything still works.
I hope this helps others frustrated by the same issue.