Are you running Vista?
What we have commented on the forums about is that the LW playlist & LW library you see in iTunes is not copiable or burnable & not transferrable to iPod. You need to properly add the files to iTunes music library first. Several ways of doing this. If using LW 5 you can set LW to auto copy files directly to iTunes. Else, you can drag & drop the files onto the iTunes Library icon from the desktop. See more here: How to transfer music to my iPod (& iTunes) {click on link}

You are not the first, many people get confused when they see the LW playlist/Library listing in iTunes. They are simply playlists to share across a LAN. But unless the songs have been copied to iTunes, they still remain in your LW download folder & iTunes is only referencing them from that location for play purposes.