This has happened to our editor twice this month (FCP 7.0.3):
We dragged a file into the browser, and got an error. That's fine, usually you'd hit OK or Cancel, but "Preparing Video for Display" showed up - and then you're toast. The error window buttons are nonresponsive and "Preparing Video" is stuck, so you have to Force Quit.
I think the first instance of the problem was with an autosave notice during a File Open dialog.
This seems like nothing with bad prefs, but coding oversight. I know FCP7 is EOL, just wanted to see if anyone else has experienced this issue.
Haven't seen a pattern with the file type. Last time it was ProRes Quicktime. Today it happened again - twice. I was importing an XML and the "Preparing video for display" opened and hanged on top of the XML import dialog.