I can drag videos into the video section of iTunes 7 & watch them from there.
Dragging from either the shared folder or the LW library works fine. Also, videos converted for iPod move to iTunes normally (actually faster than with previous versions, after converting the file it automatically moves into iTunes).

Unless someone else here has some clues, you could try the iTunes forum. Use the forum search there & see if anyone else is having the same trouble.
http://discussions.apple.com/categor...categoryID=149

Have you tried reinstalling iTunes?