This also happens with me. I have an Intel Core Duo 17", running iTunes 7.1 with the latest Quicktime, and OS 10.4.4. My movies work great in Quicktime, but won't import into iTunes at all. When I try to drop them on my iPod directly, it tells me that my 5th gen iPod can't display video.
I brought my iPod into work today, and hooked it up to the G5/dual 1.8 tower here, also running iTunes 7, and quicktime (7.1.3 I think?), OS 10.3.9. I was able to drop the videos directly into iTunes, and they showed up fine. I was also able to then put the video on my iPod.
As for the video, I converted them to .mp4 files with a 3rd party converter from .mpg files.
Interested to see what the solution is. Glad I'm not the only one with this problem!