Sorry, no I don't know what is going on there. Movie Maker only added H264 output last August, so it is relatively new to the program. And I don't use this editor at all.
From what I've read, Movie Maker is a relatively good choice amongst the free options, so you may want to invest in a better editor if you plan on doing this very much. Sony Vegas Movie Studio, Adobe Premiere Elements, and Corel Video Studio X5 are well known consumer level editing programs. And there should be trials for each available for testing.
Regarding your current .wmv file, do you want it in another format? If so, it is certainly possible to convert to H264 mp4 or mkv using VidCoder or Handbrake. And you can convert to dvd-video as well. Any conversion will degrade picture quality to some degree, but if done well, you might not notice it in playback.