I have found a solution to your problems.
Problem Defined: You don’t have the proper codecs to play or encode/decode the format of video/audio you are trying to import into movie maker.
Download and install (in order)--
1) K-lite Mega Codec Pack:
Note: When installing, don’t just fly through. Under Select Components, choose to install Profile #5 aka “Lots of Stuff”.
For those NOT wishing to install Media Player Classic, which will be the default video player, simply un-click the box under this profile. It should be the top one or near the top.
2) Windows Media Codecs:
The reason you must install K-Lite first, and then Windows Media is because K-Lite will set your system to decode windows media v7 streams using ffdshow -- which Windows Movie Maker does NOT like, and therefore will not read.
By installing the Windows Media Codecs, after K-Lite, you will overwrite the K-Lite files for JUST Windows Media. This combination will allow your system to interpret almost all codecs, and Movie Maker to do the same.