Sorry, but I don't know. If you can't find any threads on Labelflash, you might check one on Lightscribe to see if any solution for that drive not being recognized would work for you.
All I might suggest quickly, would be to remove the drive from the device manager and let Windows find it again. The image might indicate something is corrupted because of the strange characters. Maybe reinstalling some software would help. If you decide to reinstall Nero, make sure and use the clean tools for Nero 7 first.
Has Labelflash worked in any earlier versions of Nero?