You're right on; it's likely not importing because it doesn't like the file type. Windows Movie Maker can import only WMV files or captured DV-AVI files. Other file types need to be converted. Here's a page that may show how:
Converting MPEG filesIt looks horrific...lol. But useful info. I probably can help out with this one project of yours, just upload it to savefile.com then tell me exactly what to edit out.