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Those image sizes should be fine. Yes, don't have the album art separately. You need to edit the metadata of your songs to make sure that they have album art. You can do that in iTunes, or Mp3tag is a popular and powerful freeware (PC version only).
Some of my album art didn't show properly the first time that I transferred music to my T1. I had transferred the files via syncing through the Sony Reader for Mac software. I unsynced to remove the files. Then I manually transferred the files by drag-and-drop through Mac Finder (Windows Explorer). Then all of my artwork showed fine.
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