You are porbably using a video Codec that pIllusion doesn't understand. Try using a different compression codec for your video - Maybe Microsoft Video? An AVI can use any number of codecs, so you need to know what it is. Also, if it's something coming from a device, like a digital camera, and that's the only video foprmat it can output, you can download Bink and Smacker (a free program) which allow you to convert video:
You're probably trying to use a DV AVI. In order for pIllusion to load DV, you need to install a DV codec. Panasonic has a free DV codec you can install; do a websearch for "Panasonic DV codec". You'll find several websites that allow you to download it and give instructions on how to install.
After it's installed, pIllusion will be able to load DV AVI files.