Observes twitching inside damaged nose (7)
I believe the answer is:
notices
'observes' is the definition.
(noticing is a kind of observing)
'twitching inside damaged nose' is the wordplay.
'twitching' becomes 'tic' (tic is a kind of twitching).
'inside' is an insertion indicator.
'damaged' indicates anagramming the letters.
'nose' anagrammed gives 'noes'.
'tic' placed inside 'noes' is 'NOTICES'.
(Other definitions for notices that I've seen before include "Section (anag) - spots" , "Remarks upon publicly displayed informations" , "Pays attention" , "reviews" , "Sees; adverts" .)