The clue is (.mpg file)
Convert it to a WMV or AVI file and you will likely find that it will
import, create clips, and render as the MPG rarely ever does anything you
want it to do in Movie Maker.
-Wojo
I imported the MPG without creating clips, and immediately saved as WMV.
Then, I re-imported the newly created WMV version. With this version, it was
able to create clips.