I have the beta of iTunes+ and sometimes it sets my display picture to the album art even though I don't have the option checked.  It doesn't do it on every song, and I haven't been able to find a way to duplicate it.  It just happens sometimes.  Is this known to you? Is there a fix for it?

the latest iTunes+? is it still in beta?

The latest one is a beta version posted in the forum only.  I'm aware of this bug, I have sorted it out, and I'm going to release the beta as a proper final version soon, so you can expect an update from within iTunes+ soon.