m3u is simply a playlist file. It simply lists the songs & points the player to where they are.
The LW playlist is not intended for video files.
Do you have the latest nero & plug-ins? You'll probably need them. Nero can convert these avi files to mpeg2 which is what's needed for dvd. But you need to make sure nero has the appropriate avi converters. Do you have the divX codec? http://www.divxmovies.com/codec/

Get GSpot (a free program) that will identify the codec that you might need .. it's free and it will tell you what you need to play a certain file.. just open the file in GSpot and it will tell you. http://www.headbands.com/gspot/