It's the "Copy files to iTunes Music Folder" option.
This will mean that you have to look after the location of your music files yourself. If you have some music files on the desktop and you dragndrop them onto iTunes, then those files on the desktop are the
only copy of that music you have. If you move those files, iTunes will think they've been deleted. If you delete them, they won't be in iTunes anymore.
It also means that, if you're not careful, you'll end up with your music files all over the place - some in /music/iTunes music library/, some in desktop/new music/downloaded/, some in /documents/album of my mate scott/ and so on. When it comes to backing up, or transferring to a new computer, or using different playing software, this will be a PAIN. I can almost guarantee you'll lose music this way.
If you're going to keep your music on a different drive, follow the steps on this page to move your library to another location:
http://docs.info.apple.com/article.html?artnum=301748
While you're in preferences, go to advanced, importing and set it to MP3, instead of AAC. I do 160kbps VBR, but you can do whatever you like.
Videos should open by default in Quicktime, not iTunes - I'm not sure why it should be any other way round
When you've got things working the way you want, btw, you should download this:
http://itunes.pluginsworld.com/plugins/apple/930/badfruit/badapple.html which will let you use iTunes to manage your MP3 players.