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When generating the composit picture it seems that iClone don't like when you end in the middle of a line, you should try to have full lines. If you don't follow this tip you can have iClone render some white fields in your animation all of a sudden.

My own effort is to fill the entire composit image with thumbnails if I can. You can also experiment with the .INI file written for you. Decrese the number of frames containing in the composit and also play with time factor / picture. This is a great way to add reality to the animation of the composit picture on the 3D object..
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The utility is base on windows media player so it should be able to handle all format you have codec:s for in your system.
As usual I have found in my own machine that this is not always true. I don't know why but sometimes the coded does not agree with the .AVI and this utility.

What I do then is to change the codec with i.e. Windows movie editor or any other software available. Load the .AVI and resave with another maby less effective codec.

I never had problems with Microsoft video 1, it seems like a nice codec that work very well no matter how big the .AVI is.