I found an old post dating back to 2004 (possibly XP?) where someone was having trouble with MPG videos in Windows Media Maker, where the audio was fine but video was screwed up. Their solution was to drop the video into the storyboard instead of the timeline. They were then able to go into the timeline view and continue editing.
(I'm grasping at straws here lol)
well that is the issue. I can hear the audio fine, but the video looks like that picture. The part i find more interesting is that it might be an issue with WMP rather then the video. Cause played normally, the converted video plays just fine. - Once its done saving this movie, ill give what you posted a try tho.