With the iPod nano, you also have to limit the amount of songs since otherwise there isn't any space left for photo's. Took me a sec to realise what went wrong the first time.
Then again, I was just curious how it went, and how it looks on an iPod, but the screen really is very small for looking at pictures, so you better give that precious space to songs instead.
Anyway, with an Mac you do the settings in iTunes, as sad by above.