Maybe you have to enable album art support in ml_ipod first?
If it is disabled (which is default) I think it does not set the flags for album art when writing the database.
And sorry, no, there is no way of recovering the old database
. If you want to stick with iTunes, and it does not work with the current database (which is kind of strange and unexpected), you will have to "restore" the iPod, which erases everythin