I am new to Windows DVD Maker as well, bu ti did find a tutorial on how to fix this problem.
While WDM is adverised as being able to work with AVI files, it is a good idea to get a codec to do this. I was recommended to get the DivX codec from www.divx.com
Install this codec using the free download on the homepage. You don't have to install all components in the bundle. Actually, you can get away with just the codec if you want, when the option to choose components comes up during the installation process. This will allow you to load AVI items to your WDM project and then burn them on disc.
All in all, I am not entirely pleased with this software. I think Windows DVD Maker is in real need of a face-lift and update. There are too many kinks for me, personally.
Happy burning, and God bless!