ITunes 7.0 ONLY recognizes nano in disk mode

Hi All,
This little problem of mine has been driving me nuts for the past 2 days.
I recently got an ipod nano as a gift (not the second gen) and wanted to try it out. So I installed the latest iTunes 7.0 (and rebooted...), charged the nano to full battery, then plugged it in. The nano shows "do not disconnect," and Windows shows the drive in My Computer and I can navigate inside the few folders it has. When I open up iTunes though, I don't see the nano no matter how long I wait. Doing a hard reset of the nano (action + menu) doesn't help. However, when I put the nano into disk mode (action + play) and reconnect to the computer, iTunes magically recognizes it, lets me name it, and even lets me sync my music. I can't directly drop the music in the nano for some reason (there's a lock icon next to the disk space indicator).
I updated the nano the latest version through iTunes and even tried doing a complete factory reset. None of this gets iTunes to recongize my nano unless it's in disk mode. I have a 5G video iPod that I had filled on another windows machine, so I connected it using the same cable/computer/itunes combination, and that gets recognized no problem.
Has anyone had the same experience and perhaps found a solution to this?
Thank you
nano 2gb Windows XP Pro

I am having a similar problem. New Nano.. won't allow me to play mp4 so I tried to restore. It won't restore and then doesn't recognize.
I love how I have a 30g Video, Shuffle, and Nano, but I can't play my hundreds of dollars of itunes music on my nano to run. Someone needs to make a commercial making fun of itunes.

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