It's your O/S. XP and 2000 both have problems with the town AVI files. Here's the fix:
Go to the following site:
http://www186.pair.com/vdub/
Once you're there, download Virtualdub, install it, and then load the file "townmsk1.avi" from the "Townavi" directory in your Wizards & Warriors folder into Virtualdub. Save it with the "Save as old-format AVI" option with a new file name. You will get back a 32MB file. Close out Virtualdub and then rename the new file townmsk1.avi (over the old file). Do the same procedure to the other two town mask files.
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Rick
Help, Hints & Walk-Throughs at
The WWHAP