Oh no - it just gets worse !
I checked the movie maker help pages and it says -- I can use these files
Video files: .asf, .avi, .m1v, .mp2, .mp2v, .mpe, .mpeg, .mpg, .mpv2, .wm, and .wmv
I have experimented and now find that MPEG can be viewed on the timeline and not the preview...