I am experiencing the same issues as you. I am on an iMac and have an iPod Classic running software version 1.3.
Before updating with the latest iTunes update I have been able to grab songs in playlists I have created in iTunes as well as on my iPod and move them around in a different order. I am no longer able to do this inside iTunes or on my iPod. Watching the iTunes 10 video on the apple site, they show you are able to rearrange your songs by doing this. So why am I no longer able to do this?
What am I doing wrong? Is there a key I am suppose to hold while doing this? A preference to turn on? Or is this a bug?
Someone please help! We can't be the only two people out there frustrated with this issue!