Hi matt,
In the 0.3-alpha the system checks if there is an embedded artwork in the files, and if not it searches it online via Last.fm cover art API. There is no local artwork fetching yet.
In 0.3-beta there will be also the option to seek for the local artwork (usually [folder/cover].[jpg/png]) like described in this thread:
#122
So it will check and display album art with this priority:
1) embedded
2) local
3) online
It has already been implemented:
#12216
and will be featured in the 0.3-beta.