Appx 175 of these files were
downloaded from itunes store in aac form and then
converted to mp3. These files do not show any album
artwork in tagscanner and display "format unknown".
Hmm well, a couple things. First, I have no experience with transcoding aac files to mp3 - two reasons: 1) I completely disapprove of propriety file formats (so I never buy anything from iTunes) and 2) I completely disapprove of transcoding. Given that I never process files like this, please take everything I say here with a grain of salt.
I have seen some incompatibility problems when you use multiple MP3 tag processing programs, which is what we are doing here. iTunes generates/updates the tags, so does TagScanner. However I am not seeing what you are, and it sounds like you only see it with the transcoded files, so .. we must conclude there is a problem either with what the transcoding process created, or TagScanner's processing of that data. Impossible to tell which is true without dissecting the files.
More info - TagScanner allows you to specify which tags to write in your files (despite what tag formats are already in there). I choose to write ID3V1 and ID3V2 (select on the dropdown in the upper-right corner of the screen). I do this in all my programs so I have consistency. I think if you loaded a list of files in TagScanner, then selected them all, then hit Save it would update all the tags according to what types you selected. So I think this explains why your tag formats changed. You could make it match what the transcoding process did, but the fact it says the format is invalid would make me wary of that.
One important point: until you know you can really trust ANY tag-edting program you should copy some of you mp3s to a different directory and play with them for a while there until you are convinced everything works. Never perform an operation on all MP3 files you have until you are really sure the program works and does what you want it to do. You could add the temporary directory to iTunes to make sure it is happy with it, then delete those files and apply the update to your main folder.
One final note - if you see artwork in TagScanner, then it is definitely embedded in the file. It does not know anything about iTunes databases.