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It can however import m2t files which, in this case, are the same pictures but with a soundtrack.
If you ever get your files to load into pre 7, you may run into another problem:
I can load .m2v files and .mpv files into pre 7, but there is a media pending message that won't go away. When I double-click on the thumbnail in the organizer, there is a message that indexing is going on. However, the indexing progress bar never progresses.
If I exit out of pre7 and rename the file "ImporterFastMpeg.prm" to "ImporterFastMpeg.prm.xxx" and then start pre7 and open the project again, the media pending messages no longer appear.
The ImporterFastMpeg.prm file is in c:\Program Files\Adobe\Adobe Premiere Elements 7.0\Plug-ins\en_US.
The ImporterFastMPEG.prm file is needed for indexing MPEG-2 files for quick access and keeping video and audio in sync.
The good news is that in a Virtual PC the .m2v files load okay into PRE 7, so it would seem that whatever combination of codecs is installed on a PC will influence PRE 7's ability to process various video formats. I have the Mainconcept MPEG Elements plug-in installed on my real PC as well as MAGIX MEP 14+, both of which may install codecs that aren't compatible with PRE 7.