I think I may have good news for those of you who haven't been able to get the promised gapless audio playback on your iPod after installing iTunes 7 and letting it go through your songs to determine gapless playback. After iTunes kept kicking my iPod off I was at a loss about what to do next. I am happy to say I got it to work today. It's a bit of a dirty way to do it, but it works!

I found this post on ipodwizard.net by Kaneda:
1. iTunes seems to say that your iPod is up to date, if there isn't an update file on your computer. I.e., it won't actually check on the internet. However, it also seems it will check for iPod updates when it checks for iTunes updates, so try to click Help/Check for Updates in the menu. Then iTunes should tell you there's an update for you iPod - download and continue...
2. Seems that iTunes somehow fails to connect to the iPod in some cases, when doing an update - like it "forgets" it's actually there. The iPod will go the menu screen (or Charging display), iTunes will keep saying "updating iPod", and after a while it will give an error 1417 or 1418, depending on whether you chose Update or Restore. What worked for me: Click Update, then when the "indeterminate progress bar" starts in iTunes, pull out the iPod from the dock and put it back in. After that forceful re-recognition of the iPod, the update started (took only 5 seconds or so to complete). Everything works. But do this at your own risk - if the iPod has actually started updating when you pull out, there's a chance you'll be in big trouble
It took my iPod a bit longer to update, but once I did, I selected "The Who Sell Out" for gapless playback and it works seamlessly. The only problem I've had is that even though iTunes spent a good hour scanning all 10K+ of my songs, it didn't turn on the feature for any of my albums. However, if I manually select an album on my iPod, it will update it and it will play gapless. This is a major PITA given the amount of songs I have, but at least many of my albums will play right!
I hope everyone has as good of luck with this I did!