Yes, it's embedded art.
I'll check the details to file a bug.
[EDIT:] OK, never mind. I just
thought that the art was embedded 'cause I didn't know where VLC was storing it. I found it at
C:\Documents and Settings\user\Datos de programa\vlc\art\artistalbum\Katy Perry\I Kissed A Girl - Single\art.jpg.
So it's most likely not a bug at all, just a different thumbnail generation method between 1.0.5 and 1.1.0, I guess.