what processor/how much ram do you have in it? all my avchd files play back fine on my samsung laptop. it has a 2.53ghz intel core i5 with 8gb of ram. even when it had 4gb, it ran fine. i shoot with a panasonic gh1 that uses the .mts or avchd codec and i'm shooting 1080p/24fps@ or 720p/60fps i don't think you should have issues. the 'mercury playback engine' is actually really good with decoding and all that black magic/wizardry stuff.
what do you mean by this part? 'dragged the file to make a new sequence. I've changed my file extensions to mpg.' you shouldn't have to change any file extensions, pretty much every single video/audio codec is supported. i'm not familiar with the d7000, but what format is the video on that?