Well for categorizing music you pretty much get that for free with the built in software. If you have your playlists all set up in WMP on your windows pc (assuming you have one) you can perform an autosync to your treo. The music will be categorized the same in both places.
For 3rd party players your best choices (not in any particular order) are:
Comments: I've never tried the Conduits Pocket Player, but many rave about it. The CorePlayer plays music and videos and you should probably get it or the free TCPMP version of it even if you use another player specifically for music. The PocketMusic player is the one I use mainly due to the fact that it can play DRM protected music from PlaysForSure music sites and it has a great playlist editor and bass boost feature.
I don't use TCPMP for playing music, but I would think the art should just show if the img is either embedded in the file or you have the jpg in the same folder as the file.
BTW, here is 0.81RC1
EDIT: I redid the cab to fix a few things. Here is the new url:
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