I have also just bought a WD Live hub.   According to posts on the WD user forums the latest WD firmware is struggling with certain DV - avi codecs and may not play the videos.   My best advice anyway would be to render or import to mpeg, which the WD unit handles effortlessly, and apparently in very good quality.

 Setting aside any benefits gained from file size and compatibility, mpeg is a decent, manageable, good quality, widely useable format to stick to and I am sure you will be happy with the quality.