If you configure conversion options in FORMAT FACTORY correctly and then if in Windows Movie Maker you save your video with the correct video settings then there will be almost no quality loss at all.
I am talking from the experience.
I used Windows Movie Maker so many times and all my videos look so damn great.
So...in FORMAT FACTORY set the best video quality settings before converting the video to let's say AVI.
After that import that converted file in Windows Movie Maker and save it using the best video quality settings.
Here is a list of the video quality settings in XP version of Windows Movie Maker:
And here is a list of the video quality settings in Vista version of Windows Movie Maker:
So this is how I would do things if I were you.
The quality will be so damn great AND it is completely FREE!
NOTE: If you cannot import AVI files or watch them with Windows Media Player,install the XVID video codec.It has a great level of compression AND the video quality is so freaking awesome!