Same here. I tested it with three different AVI files from three different sources and none of them played properly. It's probably the most disappointing thing about my Caanoo, I know you can't expect it to be up to par with the newest smartphones but it'd be nice to be able to watch a couple of episodes of Futurama on the bus or something.
On the plus side, the three AVI files I tested all screwed up in different ways (one came out without any colour but had smooth animation, one kept freezing up the image even though the audio was fine, and the third just didn't show up in the menu) so I guess that means with enough tweaking you could probably get it working. But who's got the time? Or the high-end video software you'd need to do all that "tweaking"? Bah!