Frankly there are so many combinations I can't quite remember what's what. But here's what I did:
1) I deleted all the hidden JPG files in my music folders
2) I used MediaMonkey to embed album art in all my music files
3) I let the Zune software scan the folders, when it detects the embedded art it extracts. The Zune software extracts the images are a higher resolution, I believe 320 x 320.
4) I re-build my WMP library as the last step, and only for Windows Media Center to function...if memory serves WMP won't touch the files that the Zune software created. And WMP will read embedded images first before folder.jpg and album.jpg files.
If you're looking for high-res album art, look here:
The High-Res Album Art Project by Jason & Ashley Dunn