Time to give up and go for a drive...
I've done the following
Converted all files to mp3
Added tags
Resized cover art to 400x400
It works great on an SD card - but not on the iphone cable or bluetooth (exact same mp3 files).

On iPhone Bluetooth does some of the artwork display and some not?
How about with the cable?
Are the files that work different, or the same, as the ones before you made the changes? i.e. say track 1,3 and 8 showed artwork before the change, is it 1,3,8 that still work or is it say 1,5,7,8 that work now?