Possible Solution...
I had the EXACT same issue... Let me run down a few things. I have a PowermacG5 running Leopard (10.5.1). I purchased a new 1TB drive (external) and was going to consolidate my library on it to simplify my link to Apple TV.
Low and behold, after copying the library over to the new drive and redirecting iTunes to the new library I had the same issue. Here's what I discovered.
The new set-up for iTunes likes to have all of it's folders in the "iTunes" folder. This is a big departure from the folders being inside the iTunes music folder inside of the iTunes folder.
If you have not done to much tinkering trying to fix things, you should be able to redirect the library where you want it. Just be sure all of your music 'band folders' are in the iTunes folder and NOT the iTunes music folder contained therein.
I had done so much tinkering and moving and copying, I had to restore the library and leave it as is until a few kinks get worked out.
Something RATHER ALARMING I have found in Leopard is a huge frickin bug... Sometimes when you copy files, you lose some of the files you copy. POOF! They are gone. I was hoping this was tied in to Apples addressing a 'finder data loss issue', but it is not fixed via 10.5.1.
** ANOTHER WARNING FOR MY FELLOW Apple TV USERS **
Sometimes after you have copied a video file into your iTunes library and you change something as innocuous as the file name in iTunes, or the type of video file (i.e. Movie or TV Show), or even something as simple as adding custom album art to your videos, IT HOSES THEM. They become unplayable. I was hoping the files themselves in the iTunes folders were ok, but upon trying to open the files in Quicktime Player, they are hosed there also. When trying to play in iTunes, you simply get a white screen with no audio. Fortunately, I had not deleted the original files for Battlestar that I had spent FOREVER encoding off of the DVDs.
Any questions, feel free to e-mail.
bmrbob@comcast.net