Programs such as Microsoft Movie Maker generate AVIs which, for some reason, most other editing programs can't read until they've been run through Virtual Dub.
As I understand it, type 2 AVIs are better for editing because they have separate audio and video streams, and so most editing systems will read them.
Type 1 AVIs can make for faster throughput (which is probably why Movie Maker produces them, assuming they're for final output) but most editing programs can't read them.
I've frequently had to convert type 1 to type 2 when I'm making clips from Movie Maker (which can do a few things MS3 can not and has some more interesting titling effects) which I later use in a piece I'm assembling in MS3.
I'd be careful about using the K-lite pack as so many people (although admittedly not everyone) have reported having difficulties after installing this. Be cautious.