PMB-WMM problem

I have a Sony HDR-SR10 camcorder and use Picture Motion Browser (version 4.2.10) software to
convert the AVCD camera images on my PC. This has 2 conversion options - to MPEG or to WMV-SQ.
If I convert to MPEG the images are perfect but they are not compatible with Windows Movie Maker
(version 5.1) for editing. If I convert to WMV-SQ the images are poor - no sharpness - but are compatible with WMM. I have tried all the CODEC options on the Tools - Options – Compatibility tag of WMM and only get audio from the last 4 options – no video at all.

WMV images are compressed 19:1 and MPEG ones increase by 3% after conversion. I am running
Windows XP and have ample spare capacity on my hard drives so I don’t think that’s the problem.

What can I do to overcome this problem, please?

Ray