I do not see any "box" all I see is what I have set out in my endeavour to get it into power point. No boxes open or drop down menus other than as described in my actions
That is weird I don't have 2007 handy but it should look pretty much like 2010 with a menu to choose the type of file (arrowed)

Can you maybe post a screenshot of the folder window you see.
Might be worth trying a wmv but there should be no problem with an avi.