Ooops!
Yes, bottom left 😉
So, it shows up in iTunes when the track is selected and the artwork window has Selected Song in the title bar - I assume if you change the title bar to Now Playing and play the track that still works?
" I have also tried clicking the "display album artwork on your iPod" in the preferences window" - You've turned it off, quit iTunes, re-launched and then turned it back on? If you've done this properly the artwork gets re-optimised.
If that doesn't make it work on the nano then you may need to restore the nano and reload.
Running out of ideas here 'cos I've got a Mac and it just works.
Hope someone with Windows has a better idea.
Regards,
Colin R.