It's actually passing the whole path to the image, e.g.:
C:\Documents and Settings\Neil\My Documents\Audio\Proof of Youth.%extension%
Here is the REACT code:
If $g_coverDownloaderXUI Then
$g_coverDownloaderParams = '/artist "' & $gui_artist & '" /album "' & $gui_album & '" /path "' & $gui_albumfile & '.%extension%" /autoclose'
Else
$g_coverDownloaderParams = '"' & $gui_artist & '" "' & $gui_album & '" "' & $gui_albumfile & '.jpg"'
EndIf
Have you tried running albumart.exe on the command line, passing /path to see if it works then? E.g.:
albumart.exe /artist "The Go! Team" /album "Proof Of Youth" /path "E:\Proof Of Youth.%extension%"
Edit: Can I just check: Have you definately set CoverDownloader to point to the XUI version, and CoverDownloaderXUI=1 in the [Settings] section of your REACT.ini?
Edit 2: Actually, you may want to take a look at posts 612 to 616. This may help you.