The iPods are made mostly for music, so the CPU inside is not powerful enough to handle JPEG images, only photos prepared for its display. Battery life is more important.
If you look to use your iPod as a portable hard disk to exchange photos (and other files), you enable "disk use" in iTunes. Then you can swap images as you please in full quality.
http://echoone.com/pictures/filejuicer/enablediskuse.jpg
Or check the "sync full resolution" under Photos in iTunes. This will leave less space for music.
If you have deleted your original photos or had your Mac stolen/burnt/etc without backup, it becomes important to convert the ithmb files from it (get them with "enable disk use"). Should the large F1023_1.ithmb file from your iPod not convert with File Juicer, I will give you a free copy if you send me a copy of it for bug fixing. See File Juicer's support page if it is too large for email. On the 2. gen iPod Nano the largst images are in the F1023_1.ithmb file (_2 or higher are also used if you have many photos). Their size is 246 x 183 pixels - not much, but if this is all you have left it is better than nothing.
Just checked that it still works on my iPod Nano 2 G.
Kind regards,
Henrik