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I think 640x480 is a very good compromise between download size and quality.  Apple, however, very disappointingly bungled their movie feature by crippling it.  Unlike music, which can be burned to audio CDs, movies can not be burned onto a video DVD!  They do allow movies to be burned to a data DVD for backup purposes, but those DVDs are unplayable on most normal component DVD players.  However, Apple does have a plan..... they are releasing a new device next year, the iTV, which for around $299, will allow you to play downloaded movies on a TV.  Great- I get to spend $299 on another device to work around the crippled iTunes which prevents me from burning the movie on a DVD to play on my tv!  Well, it is possible to also play movies on your TV by connecting your video iPod to it.  However, Apple in their infinite wisdom did not give me a video cable with my video iPod, instead, I had to buy one separately!  If I'm paying $299+ for a video iPod, I'd expect at least the basic cables to come with it.  Anyways, back to iTunes....

Other things new in iTunes 7- its UI look and feel have changed very slightly.  It's pretty much the same as iTunes 6 though.  It now organizes your library by information type (movies, music, podcasts, tv shows, audio books, radio).  When viewing your video library, it is now much smarter about creating a video thumbnail representing the movie or video if it didn't already have one. 

iTunes 7 has introduced a feature to get album artwork for your songs that might not have the album covers- a really nice touch!  Another touted feature is "CoverFlow" which lets you flip through your music visually or videos (by album cover, or movie thumbnail).  It's a very cool, showy feature.  This works fine for songs, but, unfortunately, this works rather poorly for videos, as, the thumbnail images don't show up unless you stop for a few seconds, instead of showing the flipping of images in real time.  The image lag is very noticeable with videos, but not too noticeable with music album covers (unless you haven't downloaded album art already- wherein it will pause to download album art).  My computer is a 1.7Ghz Centrino, which is reasonably fast, modern processor too, so that shouldn't be an issue.

Download progress reporting is greatly improved.  I guess this was necessary since downloads may take much longer with movies.  Now it has a separate display tracking the progress of all your downloads.  I should also mention that, during a download, my computer crashed.  After rebooting and restarting iTunes, I tried repurchasing that movie, and it recognized that I had already purchased it and let me download it, so, I'm quite happy about that.

Another nice feature is the breakdown of space usage on your iPod.  It shows you how much space is used by movies, music, photos, etc.  And one other feature worth mentioning is a "backup" feature that lets you back up your iTunes content to CD or DVD.  Another useful addition is the ability sync your content from an iPod to your computer.  This feature is almost great, but again, Apple has decided to cripple this feature.  Only content that was purchased from the iTunes store can be uploaded to your computer. 

iTunes is a very nicely build content management system that seamlessly integrates managing of your movies, music, and podcasts.  It does a beautiful job of handling purchases and managing your library, and is very polished and easy to use.  All in all, iTunes 7 is a good update.  Desplit its success and great interface, there is still room for improvement.  Apple needs to stop deliberately crippling its software.

UPDATE: iTunes 7.0.1 and 7.0.2 has some major bug fixes.  Coverflow works better now.  Also, it seems to have fixed the problems with crashing on starting up when using third party audio utilities.

See also: 

iLounge's review of iTunes 7
Review: iPod Nano 2nd Generation
Review: iPod video (5G)