File types to use.
DV-AVI - This should be your first choice because of the quality it offers. If you capture as dv-avi then you have captured at the highest quality you can and have not lost any quality. If you convert the file you have to a dv-avi then from this point forward you will not lose any quality when editing. DV-AVI files are also accepted by all dvd authoring programmes, so if you want to make a dvd as your final product, it makes sense to start with a dv-avi file and use it throughout.
DV-AVI files are easy to edit because each individual frame is an i or index frame, it is a whole frame made up of all the information you need. This means if you want to use the first 7 frames, but cut out frames 8 to 10, you can do.
AVI - Audio Video Interleaved
DV - Digital Video
Not all AVI files are DV-AVI either. AVI is a wrapper and can contain many types of file, some of the more popular ones which cause trouble in Movie Maker are DivX and Xvid, both of which are highly compressed avi files.
Think of AVI like a box of chocolates. You know when you open the box you are going to get a chocolate of some sort, but it may have a nut, toffee or soft centre. When you open an AVI file you know you will get video but it maybe dv, divx or mpeg.
WMV - This should be your second choice. It is a compressed format, so, depending on the settings chosen, it will not be the same high quality as a dv-avi file and can be quite poor if a low quality option was used to produce the file. If you want to make a dvd, then only a few dvd authoring programmes will accept a wmv, so you will probably end up converting it, or after editing in movie maker, saving it as a dv-avi. It is also easy to edit in Movie Maker, again you can edit frame by frame.
See this page for more info on Mpeg verses dv.avi files.
In my experience Bitmap still pictures give no problems whatsoever and are my file type of choice.
Jpeg's on the other hand are hit and miss. It amuses me that the file type made when you save a still from a video in Movie Maker is in the Jpeg format, but this same picture can then give you problems when used in the timeline.
This is not universal though. Some of my fellow MVP's suffer the same as me, whereas some others find they have no trouble using Jpeg's.
WMA - Windows Media Audio
WAV - Windows Wave
WMV - Windows Media Video
All of the above file types give no problems when used in Movie Maker.
Now read this page for help on what to do and the types of errors you receive from using incompatible file types.