Why my WDTV live dosent read some of my .AVI video files ?   software up to date

AVI is just a container, inside there can be a number of different audio/video streams using different codecs, and not all of them will be compatible with any given device. Check the codecs used in your AVI file with a program like mediainfo, VLC, etc…  and compare with the codecs supported by the WDTV http://www.wdtvlive.com/products/wdtv_live#specs (note: where it says MPEG4.2-ASP, that includes both Divx/Xvid)