They can be done and might become the effects you use most in Movie Maker, so let's take a look at a couple examples...

Note: this code was developed for MM2.1 in XP... there are differences for the code used in Vista's MM6.

Example One:  Compositing

Compositing is achieved when a subject is filmed against a black background and using certain parameters the black background becomes transparent while the subject blends with the other footage.  With this kind of capability its great for creating fire and explosion effects! 

In the Movie Maker case the "parameters" are of course an xml transition.  So all that needs to be done is after the xml is programmed you look in your transitions section and apply it in between the clips as you would normally do with a transition. 

Here's the code you're going to need (for XP... Vista MM6 code is slightly different):

<TransitionsAndEffects Version="1.0">
<Transitions>
<TransitionDLL guid="{9A43A844-0831-11D1-817F-0000F87557DB}" >
<Transition name="Comp A add B" iconid="0" comment="DXCOMPFUNC_A_ADD_B">
<Param name="Function" value="9" />
</Transition>
</TransitionDLL>
</Transitions>
</TransitionsAndEffects>

First of all insert the composite transition in between the clips and make sure your background clip is first, then the composite clip after it.  To increase the duration of composite drag the composite clip further in into the first (remember it functions as a transition).  If you need the transition to take up the whole clip try and magnify by pressing the magnifying glass icon till you can't anymore and this time grab the transition bar and drag it to the 0.01-0.03 second mark of your clip.  This way any unnatural blink will not be present.  Though if a blink persists save and re-import the clip and trim by grabbing the beginning of the clip and dragging it inward (the same applies if there is a blink at the end of the clip).

Example Two:  Chroma Keying (Bluescreening, Greenscreening, the Whole Shebang)

View the Larger 56 Second Chroma Key mini-tutorial

A Chroma Key or the Bluescreen technique is a popular one among film makers. It is the trick used to have a solid color preferably green or blue as a background and while editing key out that particular color and replace it with a new background or image.

Though this a very neat trick to accomplish, keep in mind that due to the capabilities of Movie Maker the quality is not always spectacular.  But for a few small projects Chroma comes in majorly handy!  The possibilities are endless with what you can overlay.  There is a live example on the right (if you're having browser trouble select the link above to view the mini-tutorial).

And here ya go, without further ado, here are all the common chroma key color codes (for Vista the code is slightly different):

<TransitionsAndEffects
Version="1.0" >
<Transitions>
<TransitionDLL guid="{C5B19592-145E-11D3-9F04-006008039E37}" >
<Transition name="Chroma Non-Red" iconid="88" comment="non-red Key Transition">
<Param name="KeyType" value="1"/>
<Param name="Similarity" value="75"/>
</Transition>
<Transition name="Chroma Blue" iconid="12">
<Param name="KeyType" value="1" />
<Param name="Similarity" value="100" />
<Param name="Progress" value="0.0" />
</Transition>
<Transition name="Chroma Green" iconid="88">
<Param name="KeyType" value="0" />
<Param name="RGB" value="0x00ff00" />
</Transition>
<Transition name="Chroma Black" iconid="88">
<Param name="KeyType" value="0" />
<Param name="RGB" value="0x000000" />
</Transition>
<Transition name="Chroma White" iconid="88">
<Param name="KeyType" value="0" />
<Param name="RGB" value="0xffffff" />
</Transition>
</TransitionDLL>
</Transitions>
</TransitionsAndEffects>

I changed the code for the blue screen on 8/15/06 to align with the newer improved use of a blue colored background. It offers the most variation in how blue the color is, and often works best.

Newsletter #117 used the newer blue-screen code to make animations of a space ship in space and over the earth (the 'blue marble). Click the image to read it.

First things first, insert the chroma transition you want and make sure your background clip is first, then the chroma clip (the one with the blue/whatever background) after it.  To increase the duration of the chroma, drag the composite clip further in into the first (remember it functions as a transition).

If you need the transition to take up the whole clip try and magnify by pressing the magnifying glass icon till you can't anymore and this time grab the transition bar and drag it to the 0.01-0.03 second mark of your clip.  This way any unnatural blink will not be present.  Though if a blink persists save and re-import the clip and trim by grabbing the beginning of the clip and dragging it inward (the same applies if there is a blink at the end of the clip).

Newsletter 172 was also about bluescreening. Click the image to read it.

If your chroma transition didn't work try the one entitled Chroma Non-Red which has a more versatile color acceptance.  Or if you want to challenge yourself you could edit the color value in the line:

<Param name="RGB" value="0xcolor #" />

Some info about color value #s can be obtained at this page of the online HTML Tutorial.