Hi kstarfire,
I have the same problem with Win7 on a ATI x600, and I have made some progress towards solving this:
My laptop is a Samsung X50, 2Ghz, 2GB RAM, ATI Radeon Mobility x600 with 128mb video ram and 1920x1200 screen.
I think the problem has to do with WinSAT and your screen's maximum resolution, and has nothing to do with iTunes.
I have formatted my drive, and re-installed Vista and Win7 many many times, and even bought a second X50, so I could swap parts to try to resolve this issue, and here is what I found:
Both XP and Ubuntu Linux work fine on any screen, but Vista and Win7 only work on crappy low-resolution screens.
Once ATI x600 drivers are installed with a 1920x1200 screen, windows immediately tries to switch to the screen's maximum resolution, which seems to be too much for windows to handle. When it fails Vista will disable Aero Glass, and Win7 will
get stuck at 640x480. Both Vista and Win7 will work fine with an external XGA screen though, just like you described.
If I open up the laptop and replace the internal screen with a 1650x1080 (same as yours) then Vista glass will SOMETIMES work, but 9 out of 10 times it will still fail, so I have to spend hours starting up and shutting down, before it works.
However, my older Samsung X20, with ATI Radeon x600, 64mb video ram and SXGA+(1400x1080) runs vista just fine.
Also, if I replace the X50 laptop's internal screen with a crappy old WXGA (1280x800), then Vista glass works every time!
I suspect the same goes for Win7, but I havent tried this yet.
A better solution was to install very old Vista RC1 drivers (found on Softpedia). Then Aero glass works with ANY screen!
I think Vista and Win7 use winSAT to check your system's specs, before enabling full Aero Glass.
Unlike newer drivers, the RC1 drivers are older than winSAT, so they just work, regardless of system specs.
Newer drivers wont enable glass until after a system rating is performed, which always hangs halfway but RC1 drivers dont need this. Unfortunately I cant yet get the Vista RC1 drivers to install on Win7, due to an incompatibility, but I'm still trying.
Also, maybe its possible to set Win7 to run at 1280x800 on your 1650x1080 screen BEFORE it tries the maximum resolution, fails and gets stuck at 640x480, but I havent figured out how to do this either.
Unless a fix is found soon, I'll be sticking with Ubuntu Linux permanently.