I was having the same problem using PowerPoint 2003 while inserting .avi
files. The files would play fine in Media Player and also on a machine
running a slightly older PPT version, but would not play on mine. After a
search online, I found a document for an earlier version of PPT that
suggested reducing the hardware acceleration
(
http://support.microsoft.com/default.aspx?scid=/support/powerpoint/ppt2000/mmedia/see-accel.asp).
I reduced the hardware acceleration (Control Panel>Display>Settings
tab>Advanced button>Troubleshoot tab), and now the movies will play fine for
me as long as the hardware acceleration is set to "None" or the two settings
to the right of "None."
The "Use hardware graphics acceleration" checkbox in the "Set up show"
window of PPT is not checked, so I wouldn't have thought that reducing the
accleration would work, but it obviously did.